The World Federation of Exchanges (WFE), the global industry group for bourses and clearing corporations, on Monday issued a guidance note aimed at policy questions arising from any resurgence of market volatility.
In particular, the WFE's guidance focuses on how exchanges create fair and orderly markets; and why, when navigating times of economic uncertainty, it is better and safer to maintain continuous visibility of asset prices and "risk premia rather than suppressing markets".
Understanding these issues is key to avoiding harmful public policy in relation to all three regulatory imperatives -- investor protection, market integrity and systemic risk, WFE said in a statement.
"This year's pandemic introduced extraordinary economic uncertainty and, in such circumstances, the strangest outcome would have been for volatility to go down," it added. Even in normal times, the 'equilibrium price' is inherently transient and markets would be failing the public if they did not reflect the ever-changing balance of opinion or the arrival of new information.
As part of the generally high trading volumes in 2020, there has been a marked increase in retail participation in some countries, in both securities and derivatives. The increased retail participation has made it especially important to have a fair, transparent price-formation process, which in turn supports investor protection, the industry body for exchanges said.
Continuous operation, with some flexibility for pauses when price moves exceed typical ranges, also has other advantages as it reduces the risk of market prices moving in a sharply discontinuous manner, which could trigger systemic stress, it said.
According to WFE, a key part of the role of exchanges is their operational resilience. The WFE said it is currently working on a number of other issues related to this year's market activity, including, the role of clearing corporations in adjusting to changed levels of volatility and the importance of supporting issuers of securities in times of uncertain economic outlook.