(Reuters) - Major U.S. stock exchanges expect to reopen

(Reuters) - Major U.S. stock exchanges expect to reopen on Wednesday after Sandy, the worst storm to hit New York in nearly 75 years, closed trading for two days.

NYSE Euronext ( NYX.N ) said the New York Stock Exchange would open as usual, although it was prepared to switch to fully electronic trading if necessary. Nasdaq OMX's Nasdaq Stock Market was also to be operating on Wednesday, as were BATS and Direct Edge Exchanges.

"We have a green light," the chief operating officer of NYSE Euronext, Larry Leibowitz, said in an interview.

All of the U.S. stock market operators took part in coordinated testing on Tuesday for trading on NYSE's backup system, should it need to be used. The exercise was also aimed at allowing member trading firms, many of which are operating on backup systems themselves due to complications from the storm, an opportunity to make sure they are ready for Wednesday.

At least 30 people were killed and millions have been left without power after Sandy slammed into the East Coast on Monday. The storm shut down most businesses in Manhattan and caused a rare flooding of the subway tunnels, which is expected to keep the system closed for several days.

U.S. exchanges originally had planned to open markets on Monday, but they eventually responded to pressure from firms worried about employee safety, as well as the inability to see markets function effectively at light staffing. It was the first time in 27 years that exchanges closed because of bad weather.

Banks, brokers and others conferred for hours on Tuesday about the feasibility of resuming trade. The storm was expected to result in tens of millions of dollars a day in lost revenue for exchanges and banks, analysts said.

After two days of closure that occurred during the busy corporate earnings season and at the end of the fiscal year for certain funds, trading is likely to be volatile.

"At least in the early trade I expect an overreaction regardless of the direction. I expect to see a lot of volume at least in the first hour," said Art Hogan, managing director of Lazard Capital Markets in New York.

The NYSE, which accounts for about a quarter of U.S. stock market trading volume, tested the possibility of routing trades through its electronic platform, Leibowitz said. Under normal conditions it handles about half its volume through its trading floor at 11 Wall Street, where traders and specialists buy and sell stocks in person.

Many of NYSE's member trading firms including the top 25, which make up more than 90 percent of volume on the exchange, took part in the tests, Leibowitz said.

"Tomorrow will not be without hiccups, but will be good enough that the market will be fine," he said.

The NYSE had said on Sunday afternoon it planned to close its trading floor and to move all trading to its electronic market. It backtracked on that idea after traders and regulators expressed concern - given the difficulties and low staffing levels due to the storm - about moving everything to the all-electronic venue, a plan tested on March 31 but never used live.

An industrywide testing session was held in the morning. Rival exchange Nasdaq also conducted its own tests, as did BATS, the No. 3 U.S. equities exchange.

There were some issues at the beginning of the BATS tests, mostly related to members having trouble getting into Manhattan due to flooding and transportation problems, but those issues were resolved by midday, said Chris Isaacson, BATS' COO.

"The majority of our members connected today," he said.

The industry also tested things like volatility trading pauses to handle any abnormal volatility in securities, including NYSE-listed securities, he said.

"I expect normal trading tomorrow," said Isaacson.

Bond markets were also closed on Tuesday. Financial industry trade group SIFMA said it is recommending the market reopen on Wednesday.

September 2001 was the last extended period of time that exchanges closed. The New York Stock Exchange and the Nasdaq closed on September 11, a Tuesday, after the World Trade Center attacks and did not reopen until six days later, on September 17, the following Monday.

"It would be unprecedented to have three days of closure from a weather-related emergency, and the greater point is that American markets do not want to be perceived as anything other than reliable," said Mike Shea, managing partner and trader at Direct Access Partners LLC in New York.

"That's really the issue. An emergency like September 11 was different."

Kenneth Polcari, long-time floor trader at the NYSE, said he was still waiting to hear how the exchange would get the direct market-makers - the specialists who facilitate buy and sell orders - to the floor.

"If they aren't there and they still trade, then there is no reason for them to have those guys at all," he said.

Leibowitz said there was no plan to end floor trading at NYSE. "We think there is a role for people and judgment and responsibility. Just because you can run with technology alone doesn't mean it's the best way to run."

Recent high-profile technical snafus like the glitch that prevented BATS' market debut on its own exchange, Facebook's botched IPO on Nasdaq, and Knight Capital Group's near-fatal trading glitch have increased scrutiny of electronic trading. Nasdaq, BATS and Direct Edge are fully electronic.

MANY BANKS OPENING, SLOWLY

Plans to resume trading will be complicated by the lingering effect of the storm on New York. Sandy brought a record storm surge that flooded subway tunnels, and subway service is not likely to resume for four to five days, Mayor Michael Bloomberg said on Tuesday.

JPMorgan Chase & Co ( JPM.N ), the largest U.S. bank, expects many employees will be able to return to buildings starting on Wednesday, according to an internal memo obtained by Reuters.

One of Citigroup's ( C.N ) main investment banking buildings, at 388 Greenwich Street in Manhattan near the Hudson River, had minor flooding, and was without power, an internal memo said. A smaller Citigroup building also by the Hudson River was running on a generator. The bank expects both to be accessible within two days.

Goldman Sachs Group Inc's ( GS.N ) offices in Lower Manhattan and Jersey City, New Jersey, on opposite sides of the Hudson River, were not open on Tuesday, and by early afternoon the bank was still not sure whether they would open on Wednesday, after sustaining minor amounts of flooding.

Morgan Stanley ( MS.N ), whose headquarters is in the less-affected Times Square area, said it expects to be open for business and functioning when U.S. markets open.

Both banks had other offices open for employees to work from outside New York City through the hurricane, as well as remote access for many of their staff.

POTENTIAL FOR VOLATILITY

When markets do open Wednesday, it could come with a burst of volatility after a two-day shutdown in the middle of earnings season and just days before the November 6 U.S. presidential election. Undoubtedly, some investors will try to game out what sectors and stocks will be helped or hindered by the storm, but the broader economic effect should be limited.

"You have earnings, a heavy economic data calendar, the election cycle, it's a catalyst-rich market sitting idle for a few days and there could be an unusual reaction. We have to get through the first hour and see where the chips fall after that," said Hogan at Lazard Capital.

Some companies, including Pfizer Inc ( PFE.N ), the largest U.S. drug maker, delayed the release of results until the storm passed, but others released theirs on schedule.

Tim Ralph, a money manager at Biltmore Capital in Princeton, New Jersey, said utilities and casino companies will take financial hits from the storm, noting in particular the level of overtime that the utilities will be paying out as they deal with downed lines and power outages.

He expects shares of Verizon ( VZ.N ), Comcast ( CMCSA.O ) and Consolidated Edison ( ED.N ) to fall sharply once trading resumes.

Brian Gendreau, market strategist with Cetera Financial Group, said markets tend to rebound to their previous levels within five days after natural disasters.

"The U.S. is a very big economy, and while the magnitude of this storm could be in the billions it's actually very small in relation to GDP," he said.

Because Wednesday is also the end of the fiscal year for some mutual funds, there could be some volatility in markets as mutual funds sell underperformers by the end of trading on that day in order to avoid taxes on some of their portfolio gains.

Eric Marshall, who co-manages five mutual funds at Hodges Capital in Dallas, said his firm is moving all of the selling it had planned to do Monday and Tuesday to Wednesday.

"This is going to drive volatility on top of what we're already expecting from the aftermath of the storm," he said.

(Reporting by John McCrank in New York and Sakthi Prasad in Bangalore; Additional reporting by Ryan Vlastelica, Jed Horowitz, Chuck Mikolajczak, Rodrigo Campos, Linda Stern, David K. Randall and Lauren Tara LaCapra in New York; Writing by Dan Wilchins and David Gaffen; Editing by Dale Hudson, Andrew Hay, Leslie Adler and Gary Hill)