Open Markets to Weather the Storm

How has the Swiss Stock Exchange felt the impact of the Corona crisis from a listing perspective?
Christian Reuss (CR): The high volatility and declining asset valuations of the past few weeks make this an extremely challenging environment for Capital Raising activities. As such, there is limited issuance activity these days. Regarding the issuance of investment products such as Structured Products and ETFs the situation is quite different: On 16 March, Credit Suisse re-entered our ETF Market and listed 5 new ETFs, and we’ve seen a total of 21 new ETFs being listed during the month of March. Most active in terms of listing are Structured Products, especially leveraged products. Here we have seen a record number of over 10,000 newly listed products in March as issuers update their portfolios to new market levels.

How has the trading activity developed?
CR: The Corona crisis came as a major shock to financial markets. We saw significant spikes in volatility. A 16% p.a. implied volatility indicates that a stock moves 1% per trading day; in mid March, volatility as measured by the VSMI spiked to more than 70% – many times over the average of past years. The spike in volatility reflects the high uncertainty that hit stock markets and lead to massive reductions in asset values. This went hand-in-hand with comparatively extremely high trading volumes – and unlike “Jordan Day” in January 2015, when the Swiss National Bank unpegged the Swiss franc from the Euro, this persisted for several trading days rather than just a single day (see chart). 

Which impact did this have on spreads?
Such a trading environment usually leads to wider spreads and available liquidity being tilted to one side. On the Swiss Stock Exchange, our spreads widened, too, but relative spread changes were at the lower end when compared to our peer group of leading European stock exchanges. So we fared relatively well.

In the face of such turmoil, the question of market closures arose. What is your view?
CR: Closing the markets would not remove the underlying cause of uncertainty and hence the resulting volatility in the market. On the contrary, it would remove transparency of changing asset valuations and as a result it could potentially further spur the already existing uncertainty. The Philippines Stock Exchange in Manila – to name a current example – closed for 2 days and when it reopened, stock prices were down by 30%. To answer your question: Functioning capital markets play a critical role in ensuring global economic stability. Therefore it is important to keep markets open.

How would a forced market shut down impact asset managers and investors?
CR: It would deprive them of access to their investments and the money behind that. It would also prevent them from updating their view on the value of stocks and bonds given the current market circumstances and acting on it – this holds true with regard to both, falling but also rising markets.

Did the crisis shift all volumes to the lit market or has there still been non-displayed trading?
CR: Our own non-displayed pool, SwissAtMid, has fared extraordinarily well and provided significant value to the market. In times of high volatility market participants usually opt for certainty of execution rather than achieving price improvements. With our unique Sweep functionality, SwissAtMid allows for both at the same time. Since 16 March, we had 11 out of 15 trading days with more than CHF 1 billion in turnover resulting in price improvements for market participants of more than CHF 8 million during these extremely volatile days.

Do you expect the ongoing crisis will impact Swiss-EU equivalence discussions?
CR: I think it already has. The public vote on free movement scheduled for 17 May has been postponed with a new date not yet being defined. This vote is critical for the framework negotiations with the EU, of which the politically-induced Non-Equivalence of the Swiss Stock Exchange is an involuntary part of. However, in times of crisis, liquidity tends to concentrate on the home market anyway – so we would have most likely seen record volumes on our exchange last month even with equivalency.

From an operations perspective, how did the Swiss Stock Exchange handle the increased trading activity
Werner Bürki (WB): We are prepared for such market conditions and we have the necessary tools to support and protect market participants and investors. Our rule book allows for Trading Interruptions on an individual securities level to give traders the opportunity to take a breather and assess the situation – and to do this without interfering with the entire market. In addition, our market surveillance team ensures that transactions only take place at market conform prices – or declare a Mistrade otherwise.

How important is technology in ensuring operational stability?
WB: Technology is absolutely critical to coping with volatile markets like these. Circumstances like we’ve seen during the month of March are the reason why our systems are calibrated towards peaks not towards averages. As a result, our system capacity has been coping very well with the large volumes and velocity of trading across this volatile period.

So your systems have not been pushed to their limits?
Capacity usage is in the low double digits of our system’s capacity and we have had no outages or system issues so far. So it is fair to say that we operate not only one of the most technologically advanced, but also one of the most stable stock exchanges in the World. But the Swiss Value Chain only starts with listing and trading on the Swiss Stock Exchange – our Post-trade systems also had to cope with these unprecedented volumes.

Dear Werner, dear Christian: many thanks for these insights! And we are looking forward to the next interview which looks more specifically at the Post-trade space: Adapt, Transform, Evolve – Providing Post Trade Services in Early 2020.