For ETFs, Trading Floor Closures Mean Little

March 16, 2020

Late last week, both CME Group (CME) and Cboe Global Markets announced that as of the close of trading on Friday, they would close their open outcry trading floors in Chicago indefinitely, moving trades to electronic venues as a precaution against the spread of COVID-19. (Cboe is the parent company of ETF.com.)

Then, on Sunday, Nasdaq, Inc. (NDAQ) announced it would indefinitely close the options floor at its Philadelphia Stock Exchange, as well.

These decisions come not as a response to reports of an existing COVID-19 infection, but as a precautionary measure in line with the CDC's guidelines of "social distancing," including limiting large gatherings over 50 people, and maintaining at least 6 feet of separation with others.

For now, the NYSE in New York City remains open. But with COVID-19 cases on the rise and the local government ordering the closure of non-essential businesses, such as bars and restaurants, it's likely only a matter of time before that exchange closes, too.

Most ETF Volume Already Electronic

What do floor closures mean for ETFs, which trade on stock exchanges? It depends on the extent of the closures, of course, but generally speaking: Not much.

For starters, two of the three U.S. stock exchanges—Nasdaq and Cboe—are already all-electronic trading venues. In these cases, there isn't a physical floor to close: The open-outcry pits that CME, Cboe and Nasdaq have closed are for options and futures, not stocks and ETFs. (Read: "How Trading Halts Impact ETFs.")

The NYSE, on the other hand, operates a hybrid venue, where trades can either be executed electronically via the NYSE Arca, or go to the trading floor for auction. Only about 18% of NYSE's total trading volume still occurs on the floor, reported CNBC.

Should the NYSE close its floor, reported the WSJ, then the designated market makers who provide liquidity and run the opening and closing auctions for securities instead would connect remotely via the electronic systems. If they can't manage to connect remotely, then the NYSE will run that security's auction instead without them.

Meanwhile, floor brokers, who execute trades on behalf of clients, should also be able to electronically execute their orders, though they may not be able to participate in the closing auctions.

Some Risks For Options, Futures-Based ETFs

These days, most trading takes place electronically, but that's not to say that there wouldn't be risks and consequences to closing trading floors. For example, there's always the possibility that the transition to all-electronic trading for the NYSE wouldn't be smooth, and wider spreads or bad prints might result.

Barring any technical difficulties, though, closing options and futures pits also could theoretically make it harder to make markets in those contracts, thus impacting price discovery in the ETFs based upon them.

Currently there are 50 ETFs structured as commodity pools, meaning they hold physical futures contracts. At least another 57 use options, including nine that use options to effect a covered call strategy and 48 that use options in a defined outcome strategy. (Watch: "Defined Outcome ETFs Find Quick Traction.")

However, many commodity, currency and leveraged/inverse products, whose indexes are based on futures, are actually structured as ETNs.

Biggest Impact Felt By Exchanges Themselves?

Still, it's fairly unlikely that closing open-outcry for options and futures trading would result in anything other than minor blips, given that the vast majority of trading in these contracts now occurs electronically, anyway.

For example, on Cboe, 73% of all options volume year-to-date in 2020 has been traded electronically, including 88% of all non-VIX and non-SPX options.

In reality, the parties most impacted by a trading floor closure may be the exchanges themselves. Since last Wednesday, when CME became the first exchange to announce it would close its trading floor, the stock's price has fallen 11%.

Contact Lara Crigger at [email protected]

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