The Closing of the New York Stock Exchange’s Trading Floor Due to COVID-19

The Closing of the New York Stock Exchange’s Trading Floor Due to COVID-19

INSIGHTi

The Closing of the New York Stock
Exchange’s Trading Floor Due to COVID-19
July 2, 2020
The New York Stock Exchange (NYSE) is a major secondary market trading venue for corporate stocks.
On March 18, 2020, the exchange’s parent company, the Intercontinental Exchange Incorporated,
announced that after several of the exchange’s employees tested positive for Coronavirus Disease 2019
(COVID-19), it was taking the precaution of temporarily closing its iconic and densely packed human
trading floor. In advance of the closure, the Securities and Exchange Commission (SEC), the principal
regulator of domestic stock exchanges, granted its approval.
On May 26, the exchange reopened the floor after the imposition of health-related requirements, including
limiting the number of traders to a fraction of its former size, mandatory masks, a directive to avoid
public transportation, entrance to the exchange conditioned on temperature testing, and social-distancing
facilitated by plexiglass barriers. In addition, floor traders must reportedly sign a liability waiver that
prevents them from suing the NYSE, if they get infected there. This Insight examines the closure, its
impact, and its potential implications for the trading floor’s future.
The NYSE and the Trading Floor
Trading several billion shares daily, the NYSE, which dates to the 18th century, ranks second to the
Nasdaq Stock Exchange in trading volume among global stock exchanges. Decades ago, the trading floor
was where all of the exchange’s trades were conducted. More recently, the NYSE adopted a hybrid
electronic and human trading model, with electronic trading becoming more and more prevalent.
Immediately prior to the COVID-19 pandemic, about 80% of the trading volume was done electronically.
With the temporary closure, the exchange became 100% electronic.
The exchange conducts initial public offerings and trades the shares of companies that it lists as well as
those that are listed on other exchanges like the Nasdaq. NYSE-listed firms include legacy “blue chip”
companies such as Coca Cola, Pfizer, Diebold, Procter & Gamble, General Motors, Boeing, Johnson &
Johnson, and IBM. An anomaly among the other entirely electronic modern stock exchanges, the NYSE’s
trading floor is manned by floor brokers and designated market makers (DMMs).
DMMs, formerly called specialists, are obligated to maintain fair and orderly markets in their assigned
stocks. Operating both manually and electronically, they facilitate price discovery—the determination of
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proper share prices—during market openings, market closings, and episodes of pronounced trading
imbalances and market instability.
Floor brokers are exchange members who act as independent agents for financial service firms, pooled
investment funds, and high-net-worth individuals. They initially receive orders for stock trades directly
from clients or from clients’ brokerage firms. In pursuit of the best available share prices in the execution
of clients’ orders, the brokers interact with DMMs or bid against other floor brokers.
While the trading floor was shuttered, DMMs away from the floor remotely participated in their normal
trading activity, a protocol that persists after the floor’s reopening. During the closure, floor brokers,
however, were not able to execute trades.
The Question of the Floor’s Obsolescence
The temporary shuttering has intensified interest in an ongoing debate over the utility and necessity of the
trading floor, which some characterize as an obsolete relic. The number of floor brokers has declined from
about 2,000 a few decades ago to a few hundred before the temporary closure. Exchange officials argue
that the work done on the floor helps to reduce stock volatility and generate fairer stock prices.
For some, the floor’s temporary shutdown provided a natural experiment on the nature and quality of
trading at the exchange both with and without the trading floor. That opportunity has been exploited by
some researchers, who collectively provide a mixed picture on the benefits of floor trading.
NYSE researchers examined trading data of domestic corporate stocks with market capitalizations above
$500 million between February 20, 2020, and March 20, 2020, a period that witnessed a historically
unprecedented stock market price drop. That trading data was compared to data from the floor closure
period of March 23 through April 15, a period which witnessed a stock market rebound. The research
found that the average bid-ask spread, a key transactional cost of trading, widened after the closure. In
addition, during the critical, final 30 minutes of trading on the exchange, the size of actionable liquidity,
orders for stock trades capable of being interacted with other orders, was found to have substantially
narrowed during the floor closure.
The closing stock price auctions are the final trade executions for stocks at the end of the trading day. The
generated stock prices are critical valuation benchmarks for index funds, exchange-traded funds (ETFs),
futures, and options. Before the trading day’s close at 4:00 p.m. eastern standard time, transactions in
NYSE-listed stock are split among various trading venues, including the NYSE, other exchanges, and
dark pools. However, during the closing auctions, trading in NYSE-listed stocks is solely conducted on
the exchange.
The closing auctions account for a disproportionately large percentage of trading volume on the exchange
(about 6% of typical daily trading volume). Floor brokers play a critical role in the auctions and have
been given a monopoly on the final 10 minutes of trading on the exchange when the floor is open. Some
observers say that particularly during the closing auctions, the brokers provide valuable trading
intelligence through “… hanging out with the other traders, hear[ing] things, … see[ing] things, [and]
feel[ing] things.”
Hu and Murphy’s academic research examined the impact on the shuttered trading floor on closing stock
auctions at the exchange. They found that the NYSE’s “indicative” auction prices, which indicate
imminent closing stock prices, became more accurate after the trading floor was shut down. They also
concluded that the temporary shutdown enhanced a measure of closing auction liquidity, the percentage of
a subset of trading volume called matched trading volume (paired buy and sell orders), which jumped
after the floor closed.

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Author Information

Gary Shorter

Specialist in Financial Economics

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