If markets drop enough the losses could trigger a negative feedback loop where financial institutions automatically begin liquidating positions in order to obtain the liquid assets to cover their debts in case investors see the losses and decide to withdraw in a panic. This floods the market, driving prices down further, and potentially triggering even more automatic liquidation, leading into a death spiral.

Conversely, there is no mechanism that can push the market increasingly higher, other than hyperinflation or a collapse in, say, the bond market which might theoretically drive investors into equities. But if the bond market collapses, the world has much bigger fish to fry and the stock market will probably come down right afterwards.

In theory, you are right. So the circuit breaker is uni-directional in NYSE and NASDAQ. It is bi-directional in China, though.

The upside circuit break has very practical implications. China's current stock market was started in 1990. The general public began to paying attention to stock market around 2000. From the historical point of view, both the stock market and the general public's understanding on it are still in early stage. So the attitude on stock market is very speculative. Coincidentally, the economy in China has been undergoing stunning growth during this period, which generates a huge amount of wealth. This furthers the stock market's speculative nature. As a result, the volatility could be very high. It was not uncommon to see some stocks undergo several +/-20% changes during a week, before the upside circuit breaker was established. Its primary purpose is to curb the speculation.

As a side note, a wrong picture is placed in the article. In China's stock market, red indicates positive changes, while green indicates negative changes. It is the opposite to those in USA.

Don't forget commodity futures limits [1]. I remember in 2011 when cotton was limit up for days in a row, with the market opening the next day and locking up immediately (and options showing a "synthetic" price much higher).

Limits are subtly different from circuit breakers in that trading can continue... within the limits.

[1] http://www.cftc.gov/industryoversight/marketsurveillance/spe...

Want to thank you for the great reply.

Do you have any evidence for either of these answers? They don't match with the reasoning for market circuit breakers I've read in the past. I also don't understand why a collapse in bond markets would cause an equity markets spike that could trigger an upside circuit breaker. Or, for that matter, why a down bond market would cause an equity market crash.

according to wikipedia, the chinese market circuit breakers operate on changes in both directions:

https://en.wikipedia.org/wiki/Trading_curb#China

"If the CSI 300 Index rises or falls by 5%..."

Also, when people have short positions in the equity markets they get margin calls and are forced to close out their positions by buying stock when the market rises. This would be a similar process that roymurdock mentioned but to the upside. It's called a "short squeeze."

https://en.wikipedia.org/wiki/Short_squeeze

The underlying logic is that capital would shift from bond to equity markets, and while that's perhaps a little oversimplified I think the point is still valid. A bond market crash would trigger a risk off move [1] in which safe haven assets such as gold, the dollar, and in fact government bonds would outperform while risk assets such as equities are generally sold.

[1] http://lexicon.ft.com/Term?term=risk-on,-risk-off

China's circuit breaker is actually bi-directional. NYSE is indeed uni-directional like you described.

[0] http://www.cnbc.com/2015/09/07/chinas-latest-step-to-curb-sh...

>Meanwhile, a 7 percent rise or fall in the CSI300 Index will prompt a trading halt in the Shanghai and Shenzhen stock exchanges for the rest of the day, the statement posted on the exchange's website said. Both circuit breakers will only be activated once a day.

> Both circuit breakers will only be activated once a day.

I'm not sure what this means, given that it already specified that either circuit breaker halts trading for the rest of the day...

"Both circuit breakers" refers to the 7% all-day halt circuit breaker and the 5% 30-minute halt circuit breaker introduced in the previous paragraph (which I omitted for brevity). A full quote would make more sense:

>The proposed mechanism will be tied to the benchmark CSI300 Index, which tracks the largest listed companies in Shanghai and Shenzhen, where a move of 5 percent in either direction from the index's previous close will trigger a 30-minute trade suspension across the country's equity indexes if the move occurs before 2.30 pm local time. After that, a 5 percent move will freeze trading until the market close at 3.00 pm.

>Meanwhile, a 7 percent rise or fall in the CSI300 Index will prompt a trading halt in the Shanghai and Shenzhen stock exchanges for the rest of the day, the statement posted on the exchange's website said. Both circuit breakers will only be activated once a day.

Didn't realize that--neat!

Panic spreads faster than exuberance.

When you look at the history of commodities and equities trading you will see that a big chunk of the market can be held by people who don't feel they have enough visibility to understand why something is going down, and so when it goes down in an uncharacteristic way, they panic and join in the selling and that grows quickly. The "down" side is that people lose money from panic. But if the market goes up quickly people generally hold on to their stock waiting for it to go up still more, so there is no need to slow trading, it slows itself.

The apocryphal saying “financial markets are driven by two powerful emotions – greed and fear.” is fairly simple but it does capture the essence of the primary movers.

ChuckMcM has got it.

Several others have discussed some other relevant effects, which I agree with: - fear produces more violent market movement than greed - stocks have a natural minimum, but no natural maximum

I don't think anybody has mentioned another reason: stock markets are _naturally_ "long" rather than neutral. When companies issue public offerings (e.g. an IPO), they create shares of stock from "thin air"--that is, there is a buyer who ends up long (owns stock), but nobody ends up short. However, once stocks start trading on the secondary markets, every buyer is paired with a seller. So always, the sum of all long positions exceeds the sum of all short positions. On average, everybody is happy when the stock market goes up, and everybody is sad when the stock market goes down. So it makes sense to place a speed bump on the downside only.

Compare this to derivatives (futures, options) where there are no "public offerings", and every single trade is a buyer and seller paired. There is a net balance of long and short positions at all times. Consequently, many derivatives have limits in both directions. Note that some derivatives have no limits (whoa scary), and many equity index derivatives carry over the one-sided limit. S&P 500 futures, I believe, have two-sided limits outside of core US market hours, but only a downside limit once the stock market opens.

> Isn't that kind of playing favorites to folks playing one side of the market vs. the other?

We also often see things like bans on shorting stocks. Again a bias to being long equities.

The futures markets have circuit breakers in both directions. They are called "limit up" days or "limit down" days. There are stories of commodity traders that got entirely wiped out when some futures were limit up or limit down for days or weeks, and that they couldn't exit their positions.

When I was trading corn and soy, I've seen a few limit up/down days myself, but thankfully never caught in them.

Stock prices have a floor but no ceiling. Just like we worry about accidentally dropping eggs, but not about accidentally throwing them infinitely high.

This is true in theory but not in practice. For example, NASDAQ OUCH, which is one of the most popular protocols for entering stock orders in the world, has a maximum price of 199,999. A stock trading at one dollar can go up by a factor of 1000, but only once. See http://www.nasdaqtrader.com/content/technicalsupport/specifi...

A more subtle ceiling is why companies split their stock: a huge price per share distorts the market. Imagine if Costco were the only place you could buy butter, but they sell it in five-pound packs. Individuals might not buy any.

I was under the impression that the Chinese stock market has a circuit breaker that applies in both directions. Not an expert but random googling does seem to match with this:

"when it goes up or down by 7%, it usually means that sharp volatility has taken place in the market, which is likely to face the extreme systemic risks. Therefore, the market needs more time to calm down so as to prevent the spreading panic from intensifying the market fluctuations."

http://english.sse.com.cn/aboutsse/news/c/c_20151207_4019977...

"Meanwhile, a 7 percent rise or fall in the CSI300 Index will prompt a trading halt in the Shanghai and Shenzhen stock exchanges for the rest of the day"

http://www.cnbc.com/2015/09/07/chinas-latest-step-to-curb-sh...

It applies in both directions, however it has only existed while the market was going down fast.

Also, I very much doubt China is going to start disappearing traders who make their stock market go up 5% like they're doing now :

http://www.ibtimes.co.uk/china-arrests-197-authorities-pin-b...

Just a guess, but maybe because people are more likely to "panic sell" than they are to "panic buy".

This certainly isn't a perfect answer, but for one, markets don't really do that. They climb steadily and drop quickly.

The old stock market adage is "you take the stairs up, and the elevator down."

That's... an optimistic take on "markets."

One of the main reasons is control. Each and every buyer can unilaterally make a decisions to sell their entire position at any moment. The overwhelming majority however do not have either the reserves or the credit to do the opposite and buy at the same magnitude.

i.e. if I have a $1 million dollar position, I have the power to try to sell $1 million dollars worth of stock, but I can only buy another $1 million dollars if I have that amount liquid in the bank or I have enough credit to borrow $1 million to double my position.

Upward movements are attenuated (or accelerated) by the quantity and velocity of credit available in the market.

They are limited in both directions now. See LULD. And somebody please update the Wikipedia page for Trading Curb as I just read 13 replies here repeating incorrect information.

The reason is that selloffs spread panic. If a market is crashing by 7% or more it can easily lead lots of other people to sell just for fear. This is not a problem for markets that go up.

Why is people selling a problem? For every seller, there is a buyer. (Or, that is, for every sale there is a buyer.)

If something serious is happening in the economy, it seems unfair to me to simply halt trading, forcing everyone who has stock to be stuck with exactly what they've got, leaving them unable to sell and other people unable to buy. If people want to trade their property, why prevent them?

The explanation usually offered by those instituting these circuit breakers is that they don't have any problem with people who want to trade at some price eventually trading at that price, they just don't want people to have to trade without thinking it through due to extreme time pressure.

For example, there might be a rumor (perhaps started by an unethical competitor or market manipulator) that Company X was just caught in some sort of scandal. Those who panic most and sell soonest might get a better price than those who take the time to find out the truth, providing a potentially serious financial motivation to panic. Panic, and rapidly falling prices on something large, can cause sales of other assets as a hedge against others selling assets as a hedge...and it can cascade out of all proportion to what is actually happening in the economy.

The idea of the circuit breaker is that it stops everyone from trading but doesn't stop the news or analysis. Let everyone catch up on the news--what's really going on in these companies and their markets--and then let people trade based on facts, not panic. After more is known, and known by all, those who still want to trade will be allowed to do so.

Whether it really works out that way in practice is a different question. A circuit breaker that doesn't stop trading long enough for anyone to learn anything beyond additional rumors might merely allow the panic more time to spread, but the above is the usual explanation given by those who make the policies.

Only one of these generates "String up the manipulative bastards who stole all our money!" headlines.

There is

Yes.