NYSE closing shows major flaw in U.S. financial markets

11/8/2012

A scathing opinion piece in the Wall Street Journal by Arthur Levitt, chairman of the U.S. Securities and Exchange Commission from 1993 to 2001, points to the latest closing of the New York Stock Exchange (NYX) due to Hurricane Sandy, already downgraded to a “post-tropical cyclone” at landfall, as an example of flawed New York-based financial market infrastructure.

According to Levitt, U.S. financial markets are the best in the world as places to raise and distribute capital. But the “interior plumbing” is not uniformly trustworthy and tested. “Some firms and markets have done the necessary work, while others have not. And neither the markets nor the regulators have done enough to hold market participants uniformly accountable for shortcomings,” says Levitt.

Levitt says all the ingredients are in place, ”improved technology, heightened awareness of risks, and the ability to disperse market operations across multiple sites around the country and the world.” But they are not deployed, leaving the financial markets prone to disasters.

In the past few decades many unplanned market closures ranging from several minutes to several hours were caused by power and weather issues. And the 9/11 tragedy made it disturbingly obvious that New York’s financial markets are at risk of shutdown.

When he was chairman, Levitt pressed the financial markets to invest in alternate trading locations to address dependence on personnel and equipment in Manhattan. The NYSE invested in backup power and remote trading platforms, but those systems apparently did not have the confidence of market members, who decided to suspend trading in the face of Sandy.

Levitt believes there is a pattern of failure in core functions and a deeper flaw in the management and regulation of these markets. But, he believes the issues can be fixed. “Trillions of dollars and the reputation of the U.S. as the world’s financial capital are at stake,” says Levitt.

Take a look at other historic Exchange closings.

To review the most recent bank performance, see Weiss Ratings’ complete lists of the strongest and weakest banks at www.weissratings.com/banklists . Or to purchase a domestic bank report with the Weiss Financial Strength Rating go to www.weissratings.com.

Also see the domestic and global undervalued portfolios for potential value bank stocks.