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Dave Sekera: This is Dave Sekera, on behalf of Morningstar, along with Ben Johnson, Morningstar's director of ETF research, and Colin Plunkett, equity analyst and Morningstar's equity research guru.
The New York Stock Exchange announced that is implementing its business continuity plan and will temporarily close its trading floors, and move to fully electronic trading beginning on Monday, March 23.
Ben, to start us off, what impact could this change have to electronic-only trading mean for exchange-traded funds?
Ben Johnson: I don't see this having any real meaningful impact, Dave, on the trading of ETFs, which many of which call the New York Stock Exchange home, especially when it comes to the open and the close of the ETF trading on any given day. For a long period of time, most of that's been handled electronically. Notably late last year, the New York Stock Exchange made a big deal about actually putting physical human beings back on the floor to keep tabs on ETFs, especially near the open and near the close. So I think it's almost back to business as usual as far as ETF trading is concerned. Now that said, the prevailing market environment has been historically volatile.
So what I would say to ETF investors right now is first and foremost, if you don't need to trade, don't trade. If you absolutely must trade, use limit orders—"use limit orders” is just good ETF trading hygiene. It's the “wash your hands” hands equivalent of ETF trading, in fact. And if you must trade, avoid doing it near the open, avoid doing it near the close. What we've seen in recent days is market volatility has caused circuit breakers to trip, especially during opening market hours, and we've seen some pretty severe price dislocations among the ETFs. So first and foremost, if you don't have to trade, don't. If you do, use limit orders and avoid the first hours of the day and the last hour or so, and you should be just fine.
Sekera: Well that's great advice. Thank you very much. Colin, moving over to you, what impact do you think this change will have on stock trading itself?
Colin Plunkett: I don't think individual investors will notice any material change. A major reason the NYSE trading floors still exists is for its closing auction function, which determines the closing price of stocks. This is what gives the NYSE an edge over all other equity exchanges. Only institutional investors really participate in that auction. Closing the NYSE trading floor really shouldn't give retail investors any major worries.
Sekera: So do you think this temporary change, where they closed down the floors, might potentially impact what exchanges a company will utilize to list their shares in the future?
Plunkett: So the other major reasons in the NYSE trading floor still exists is that it serves as a marketing asset for the company. Ringing the opening and closing bell is still a great way for CEOs to promote their initial public offering. And for that reason, the NYSE would like to reopen the floor as soon as possible. Eventually the trading floor will reopen and then NYSE will be able to use the symbolic importance of its floor to attract companies. So I don't expect any material changes to NYSE's attractiveness to companies to list there.
Sekera: OK. Now switching gears a little bit, do you think this will have an impact on the fair value estimate for either Intercontinental Exchange, who owns the New York Stock Exchange, or its competitors such as NASDAQ and CME Group?
Plunkett: Good question. No, I don't believe closing the floor will have a meaningful impact on fair value estimates. Closing the floor is a short-term issue and Morningstar's fair value estimates are based on long-term projections of company's free cash flows and this is very much just a short-term blip for Intercontinental Exchange.
Sekera: Now we have seen significant declines across the entire equity market, including the different exchanges. At the current levels, do you see value in the stock of any of the exchanges?
Plunkett: Definitely. While investors may not appreciate the recent volatility, volatility is actually good for exchanges. It increases trading volume, which boosts and exchanges revenues, and for the first time in years wide-moat CME Group is actually trading below our fair value estimate. We recognize it's a modest discount but for worried investors looking for a company that will actually benefit from this volatility with an attractive dividend yield, CME Group very well could be an attractive option.
Sekera: Great. Well, thank you very much. Ben, Colin, thank you both very much for sharing your insights and helping investors put this news into perspective. For more research and insights, please visit Morningstar.com. Thank you.