Aiming at the policy questions arising from the resurgence of market volatility, The World Federation of Exchanges (WFE), the global industry group for exchanges and Central Counterparty (CCP), has issued a guidance note. In this year, apart from the investment institutions that manage pensions and other savings, there has been a marked increase in retail participation in some countries, in both securities and derivatives. This has made it especially important to have a fair, transparent price-formation process to support investor protection.

The WFE’s guidance focuses on how exchanges create fair and orderly markets; and why, when navigating times of economic uncertainty. Their advice is to maintain continuous visibility of asset prices and risk premia rather than suppression of markets. Understanding these issues is key to avoiding harmful public policy concerning all three regulatory imperatives- investor protection, market integrity, and systematic risk.

Markets are unending multilateral debate about the prospects of companies and how other market participants will position themselves. COVID-19 pandemic this year introduced economic uncertainty, and in such circumstances, the strangest outcome would have been volatility to go down. WFE further said that “Even in normal times, the ‘Equilibrium price’ is inherently transient, and markets would be failing if they did not reflect the ever-changing balance of opinion or the arrival of new information.”