Hurricane Sandy Grinds the Global Money Engine to a Halt
The advent of fiber-optic cable, automated electronic exchanges and high-frequency trading bots has rendered human presence on physical trading floors irrelevant. The global financial system runs almost entirely on a network of machines distributed around the world. But as Hurricane Sandy plows its way into two of the world’s most important financial centers—New York and Washington—Mother Nature is proving that the markets need more than robots. The financial system just can’t work if too few of its flesh-and-blood people can.
Emergency-management expert Eric Holder is already branding the “unusual storm” a Black Swan event. And the global capital markets seem to be responding by making it up as they go along. The New York Stock Exchange announced on Sunday that it would pull all floor traders but stay open, operating as an all-electronic exchange for the first time in its history. But that announcement was quickly followed by a sharp rejoinder from the Securities and Exchange Commission. The upshot: all U.S. stock markets, including the NYSE and the all-electronic NASDAQ, were shut down for Monday—and Tuesday. Recent events—the 2010 Flash Crash, the botched BATS IPO, the robo-disaster at Knight Capital—show that letting the robots run free and trade without human supervision can be incredibly dangerous. And since the New York Stock Exchange has never operated in an all-electronic mode before, any possible malfunction or glitch that couldn’t be noticed quickly and corrected by floor traders would be another black eye for stock exchanges.
Money makes the world go round. And today, cash zips around the world at light speed at all hours of the day. But Sandy has done what was once thought to be impossible: it has stopped money from moving. An options trader in Chicago who couldn’t go into work today said the market shutdown was “better than a snow day.”
A total market shutdown is incredibly rare; it hasn’t happened since Sept. 11, 2001. And Sandy is even stranger—and more disruptive—than past market closures because of its massive wingspan. In the years since 9/11, financial companies have sought to protect themselves from disruptions to Manhattan by setting up satellite offices or redundant trading floors (or simply relocating to) New Jersey, Connecticut, or Westchester County, New York. The largest trading floors in the U.S. are now in Stamford, Conn. But this week, the same phenomenon that is making lower Manhattan a no-go zone is making it impossible for workers in the vast financial metroplex that stretches from Boston to Washington, D.C., to get to their offices.
Goldman Sachs and Citigroup have activated their emergency plans, first put in place after 9/11. Other firms have booked hotel rooms for their key employees, according to Reuters. Goldman’s swanky new headquarters at 200 West Street is smack-dab in the evacuation zone near Battery Park City. Turns out that Greg Smith’s tell-all memoir may only be the second-biggest storm the storied firm finds itself engulfed in. And the company’s back office in Jersey City looks to be under threat as well from the rising waves. As CNBC’s John Carney noted, “When storm surge hits, 'bailing out' Goldman and Citi may become a literal thing."
But it’s not just lower Manhattan. An Amtrak’s ride from Wall Street, Hurricane Sandy is throwing another wrench in the world’s money engine. If New York is where assets are traded, Washington is where some very important ones are created: Treasury bonds. With D.C. also under Sandy’s grip, the Treasury has announced that it will move around its auctions of federal government bonds. Auctions—the process through which the government prices and sells the debt used to fund itself—for 13- and 26-week Treasury bills went off as scheduled on Monday, while the four-week bill auction scheduled for Tuesday closed Monday morning. For at least one more day, the U.S. was fulfilling the world’s thirst for safe, liquid assets.
One way to protect networks is to distribute the assets geographically. And America’s financial markets are distributed—the most important options and commodity exchanges are based in Chicago, for example. But the SEC decided that it doesn’t make sense to have one satellite component of the markets open while the rest are riding out the storm. The Chicago Mercantile Exchange, which trades futures electronically, halted trading for stock and stock-index futures at 8:15 a.m. Monday morning. Trading for interest-rate futures ended at 11 a.m. in line with a recommendation from SIFMA, the securities-industry trade group, that all dollar-linked trading close Monday. SIFMA recommended that all bond trading in dollars be canceled Tuesday as well. According to a CNBC report, the stock market will remain closed tomorrow. While the New York Fed, housed in its lower Manhattan fortress, remains open, it has announced delays in planned purchases of Treasury debt. Some of its lending operations also closed Monday afternoon 30 minutes earlier than scheduled.
It’s not just the big banks who can’t move their money around. Regular checking accounts are going to become a lot less liquid as the rain starts to pour. Chase, the biggest retail bank in the metro area, has preemptively closed branches in New York, New Jersey, and Connecticut. Thankfully, it has also sent out notices saying it won’t charge overdraft fees until Thursday. Citibank is also waiving ATM fees for any New York City residents who have to turn to another bank’s cash machine.
Several firms have also announced that they plan to postpone reporting their earnings, including Office Depot, Sirius XM Radio, and Pfizer. And the Labor Department hasn’t yet decided whether it will still announce its much-awaited, politically explosive October jobs numbers on Friday.
Otherwise, it’s business as usual.