L1 - 7% down before 3:25pm - 15 minute halt
L2 - 13% down before 3:25pm - 15 minute halt
L3 - 20% down - halted for the remainder of the day
Only a single L1 and a single L2 breaker can occur in a single day, e.g. the market falling below 7%, rising, then falling again will not trigger a second L1 breaker, but falling to 7%, up to 5%, then down to 13% would trigger an L2.
FYI this is the kind of thing you have to know to become registered as a securities representative.
It's not intrinsically a "bad" thing per se and it was something already established long before the current set of conditions arose. But none the less, it's an artificial constraint introduced on trade systems that is likely beneficial.
But we are not rational actors. We can get into panics. Panics can stir more panic. Forced breaks allow for the market to reassess data for a few minutes without fear of loss for not acting immediately.
I think there is scope for designing market mechanisms which have the volatility-reduction effects of periodic auctions, but which still allow market makers to hedge. I hope people are working on those.
And how is that a bad thing in and of itself? It would presumably knock out some of the ultra-low-margin HFT but so what? If it would have the effect of turning the stock market into less of a roulette table, with fewer gamblers compared to bona fide investors - isn’t that a good thing?
T6: Halt - Extraordinary Market Activity Trading is halted when extraordinary market activity in the security is occurring; NASDAQ determines that such extraordinary market activity is likely to have a material effect on the market for that security; and 1) NASDAQ believes that such extraordinary market activity is caused by the misuse or malfunction of an electronic quotation, communication, reporting or execution system operated by or linked to NASDAQ; or 2) after consultation with either a national securities exchange trading the security on an unlisted trading privileges basis or a non-NASDAQ FINRA facility trading the security, NASDAQ believes such extraordinary market activity is caused by the misuse or malfunction of an electronic quotation, communication, reporting or execution system operated by or linked to such national securities exchange or non- NASDAQ FINRA facility.
H10: Halt - SEC Trading Suspension The Securities and Exchange Commission has suspended trading in this stock.
Trading halts may or may not fix that, but that's their purpose.
Then they're doing it wrong. You shouldn't have money that you need immediately in the stock market. Yes, people will do that anyway, but I'm not sure we should cater to those people when the health of the markets as a whole are at stake (assuming circuit breakers are effective; up for debate).
It is actually expected that the market will typically go up, not down. Otherwise there would be no difference between investing and gambling.
Basically - we should protect against any really dramatic sudden changes as chances are that something is wrong.
In the last year the S&P grew ~22% prior to this recent drop, that's fine... and on a day swings in the low single digits might be fine. But if we woke up tomorrow and the S&P had recovered the pre-drop value and then grown 20% over that price - something weird is clearly going on and we should be worried.
For instance here is a toy example of unbounded value: Consider a market for a stock in which the only market participants are two bots with the behavior that they trade the stock back and forth at an asymptotically increasing price. The buys are backed by loans from a zero interest government bank. Since the bank is efficiently hedged to losses. Both sides of the trade owe the bank, the seller can also pay the bank the money the bank needs to back the buyers loan. Thus, the bank could allow both these loans to go to infinity causing the value of the asset to approach infinity.
Similar things have happened with flash loans in the cryptocurrency space.
Emptying out all the asks is a thing that happens.
I don't follow. You'd hit 7% before 13%, so how would L2 ever execute?
This phrasing makes sense. Thanks!
But each of the L1 or L2 can only occur in a single day, not one or the other. You can hit L1, and then later hit L2, but you can't hit L1 twice.
Does that help clear things up?
I assume they have been tweaked since 1929, but they started with the crash back then.
Edit: someone else is claiming 1987 as the start. My memory says 1929. If this matters do your own research.
https://en.wikipedia.org/wiki/Aftermath_of_the_repeal_of_the...
Then why does L2 exist? It seems redundant, L1 would get triggered before L2, and only one can occur in a single day, so why have L2 at all? What am I missing here?
Edit: Also, anyone who downvoted me for posting the same question as someone at the same minute, you know what to do.
Please don't comment about the voting on comments. It never does any good, and it makes boring reading.
They're more tedious to write than to read, if that helps at all.
https://hn.algolia.com/?dateRange=all&page=0&prefix=true&que...
Nice point about only 2 daily. But still seems crazy.
The concept was introduced in US equities after the ‘87 crash, but was only consistently implemented for NYSE-listed stocks. In ‘13 these were made consistent and market wide (thus MWCB), set against a widely published value of the S&P (so that the control was predictable; thus how it executed today).
FYI, there are also bidirectional halts that exist intraday (Limit-Up/Limit-Down) that serve a similar purpose and control rapid, uncontrolled movements in individual stocks. These are also defined in exchange regulation and are well defined so that they are predictable.
So are we saying the market will be perpetual because it's not allowed to fail ?
At what point does the https://en.wikipedia.org/wiki/Pareto_efficient not apply ?
If it's manipulated, the efficient seems moot.
(For a more humorous statement: https://www.youtube.com/watch?v=oap6_U8-HvI)
It's beneficial for people who want to buy stocks cheaply or if we truly believe that markets are about price discovery.
Exactly, and when you have an unorderly market, price discovery becomes problematic.
It’s the same reason the single stock LULD bands exist (which put the brakes on both rapid downward and rapid upward movement). Stopping for 15 minutes (or 5 in the case of a LULD pause) is not detrimental to the process of establishing orderly price discovery.
In the event a stock is going to keep rising or falling due to legitimate changes in valuation it will continue to do so (look at NASDAQ’s halts page today to see stocks that have hit their bands multiple times).
this is not incompatible with the believe that prices over a single day (or hour) can be dangerously noisy.
I think you can discover the price tomorrow.
So don't worry, it's only us regular guys that get screwed. Big firms can still contact each other to make deals.
There are a lot of firms whose core business strategy is to keep a level head and take advantage of people who panic and (over)react on days like this. They get damn rich doing it, too.
If you're a little guy who believes that, say, 2019ncov is about to tear the world a new asshole, that's probably a decision you'd like to make for yourself.
I don't doubt what you're saying, but it's a matter of perspective. Sometimes the "panic" is the correct reaction. We're sitting on top of a perfect storm which is shaping up to be a massive potential black swan. And with the current circuit breakers, trading is only interrupted for something similar in concept to "the 99%".
Across all indicators, too! Oil price, US markets, international markets, t-notes, gold price, and a bunch I'm probably not aware of because I'm not a professional investor. China just shut it's economy down for two weeks. Long term outlook is rightfully poor.
Panic is almost never the correct reaction. Deciding that there's going to be a downturn and you should prepare yourself for it financially is one thing, but under what circumstances would it be optimal for you as an individual to panic-sell?
In my mind, panic is the thing you do when you realize that you haven't prepared. That you don't have enough resources for an extended downturn, that you're financially over-leveraged, and that you are in danger of losing your home and being unable to feed yourself and your family. There are TONS of people who are experiencing this right now in China and Italy, and many others of us who will be experiencing it the next few weeks in the rest of the world.
But panic also implies that you don't have time to fix that, and there's nothing you can do as an individual to change it. If that's the case, you probably don't have a lot of investments in the stock market anyway. Or if you do, and you're over-leveraged in the markets because you were gambling with your money instead of investing with it, then yes, you're panic-selling right now.
There is an exception if your religion lets you take your stock with you. I don't believe in one, but I guess if you want to.
And what's the rational thing to do in such a case? Let's say you're at a poker game. And you have a deal: you lose, you get shot, you win, you get your winnings. What is the rational thing to do?
You should go all-in. It is one of the very few cases it is actually rational to do that.
If anything this is helps the little guy, by not completely crushing their stock value, and hurts the big guys who can outlast huge swings (something little guys cannot).
And when everyone is selling, who do you think is buying? No one is moving much of anything for those 15 minutes
For a very popular stock on a typical day the market maker isn't really necessary. Your trades would absolutely execute immediately based on positions other people wanted.
When your stock is more thinly traded, or when things are a bit frantic the market maker is your saviour. When everybody and their dog is selling, the market maker will buy anyway.
Under some circumstances market makers can signal they intended to cease to make a market for specific stocks. When the market makers exit, all hobbyists should make sure they are gone too. Once there is no market maker for the stock you're holding, you will need somebody else to actually take the other side of your trades. "Prices" without a market maker are just a guess, there may be nobody actually promising to take your stock at any price, even if the last trade was for $1.40 your stock might be not sell even at 14¢. This makes for an exciting space in which to gamble with money you can afford to lose if you really know what you're doing, otherwise it's just a way to throw money away.
From the 1988 "Report of the Presidential Task Force on Market Mechanisms : submitted to The President of the United States, The Secretary of the Treasury, and The Chairman of the Federal Reserve Board":
---
Our understanding of these events leads directly to our recommendations. To help prevent a repetition of the events of mid-October and to provide an effective and coordinated response in the face of market disorder, we recommend that:
• One agency should coordinate the few, but critical, regulatory issues which have an impact across the related market segments and throughout the financial system.
• Clearing systems should be unified to reduce financial risk.
• Margins should be made consistent to control speculation and financial leverage.
• Circuit breaker mechanisms (such as price limits and coordinated trading halts) should be formulated and implemented to protect the market system.
• Information systems should be established to monitor transactions and conditions in related markets.
https://www.sec.gov/oiea/investor-alerts-bulletins/investor-...
The market-wide circuit breakers, which triggered this morning, only apply to declines.
There's no downside in great news (other than the possibility of a quick reversal thereafer...)
It's pretty symmetrical. Choosing not to buy is not as easy as it looks, when you are under pressure to do so. Madoff took advantage of this. The crash of 1929 was preceded by unhinged buying.
Even better: the percentage split between long and short holders isn't 50%/50%
It is weird given that this information is not hidden. It is just not widely spread.
Having common sense regulations and tools like circuitbreakers are fine with me. I wouldn't say it's meaningfully less of a free market just because we have these tools in place to protect us against the automation we use.
If you are facilitating the trading of regulated instruments this is wrong and there are indeed SEC regulated circuit breakers you will have to implement.
Consider an analogy. Suppose you were a stamp collector and you wanted to run a weekly stamp exchange. You and your fellow collectors may establish rules about how the trading should happen and the agreed upon behaviors. By-laws if you will. You could of course have no rules. Or you could choose some that promote the overall longevity of the venue and that encourage robust participation. The choice is up to the owners. Both are free. But one will be more successful than the other.
Even anarcho-capitalism doesn't go that far.
I am arguing that rules set up by the market do not automagically enforce free market. I am arguing that rules explicitly do the opposite by introducing guard rails, which DO restrict movement in that free market.
Do you honestly believe that rules derive its effects from who sets them up?
Can you define what you mean by free market? Is two parties freely coming to a mutually beneficial agreement that they are then constrained by (i.e. a contract) consistent with that definition?
That said, I am not sure what you disagree with. Please elaborate.
Assuming you agree with my characterization, on the surface nothing about the transaction facilitated by the intermediary makes it not consistent. You have my full support here.
Now, your argument appears to revolve around knee jerk reaction to me saying that in real free market, the rules would not artificially prop the market. My argument is that in a true free market, the rules would not restrict it arbitrarily.
Ergo, we do not have a truly free market, but just a reasonable approximation agreed for by various parties.
Would you accept that?
The agreement to restrictions is still between two parties, but you can read it as "two classes of parties" if it makes you feel better.
> Now, your argument appears to revolve around knee jerk reaction to me saying that in real free market, the rules would not artificially prop the market. My argument is that in a true free market, the rules would not restrict it arbitrarily.
It seems like you're confused about a couple of concepts here and I think it may stem from overloading the words "free market" and the concept of "the free market" generally.
The stock exchange, like any real world marketplace, has many restrictions on trading. These make it a market that is not free in the sense that you cannot trade however or whenever you like. However, the free market is a distinct concept from any individual exchange. It means that parties involved in the open market (i.e. everyone) are able to freely exchange goods and services as they choose. This may involve entering into agreements (like contracts) that restrict future actions, but as long as those agreements are freely agreed to, this is still consistent with the concept of a free market generally. Thus, the fact the stock market has restrictions is still consistent with the concept of a free market so long as the participants freely agreed to those restrictions.
Does that clear anything up?
I will sleep on it a little, but thank you for trying to clear it up for me.
The rules are well-known and set in advance by the SEC and exchanges. In this case it's SEC Rule 80B and NYSE Rule 7.12.
You can read more about trading curbs here [0] and this one in particular here [1].
You might consider it manipulation, but these circuit breakers have been in place for a long time now, IIUC ever since the major market crashes of the 80s when there was no way to slow down the drop. The idea is to potentially lessen panic selling by allowing more time for more information to come to light which might mitigate some of the volatility.
Of course, there is no guarantee that better news will surface in the meantime, but even if the eventual slide will be much larger, its better that it takes place over several days to allow counter-measures to be put into place.
There is, however, no "liking" or "disliking" market direction. It's automated, with clearly-outlined rules. There's no manipulation; if A, then B.
It’s funny how this “ideology of the pure market” has become popular. This idea here is essentially the same as the outrage when obviously wrong transactions are rolled back. The number of people willing to, or entirely oblivious of the possibility not to, let (others) be harmed by fraud or mistakes, in pursuit of some romanticized purity is astonishing.
https://www.amazon.com/gp/product/B081ZD9CL1/ref=dbs_a_def_r...
In the flash crash (2010), it was later determined that the largest part of the drop was driven by competing systems racing to the bottom solely because competing systems were selling off too.
If the price is going to go lower for an organic reason, it will go lower regardless of a brief delay.
This is a dangerous game, in that it is indeed revealing the artificial, make-belief, nature of financial markets.
True, if surprising to me. It's a rule from the onset. I didn't know that.
Limit up/down rules are not discretionary. They're circuit breakers that fire deterministicly.
There is also no automatic upside circuit breaker.
Here's a brilliant idea, introduce a rule that says you can only sell a security for more than what you paid. Voila, endlessly rising prices forever!
Feels like a con.
Of course, for a transaction of a certain value, you wouldn't want to hold the cash or certificate, so instead you write out a contract and sign it at the moment of exchange. Which is the same as buying or selling something else (e.g. car, house) beyond a certain value.
They are not. For any meaningful interpretation of "actual", the only price is the market price during trade hours. Speculative overnight agreements between private parties at agreed-upon values are contract agreements. The stock price doesn't change between market close and open.
Is it the bid? Is it the offer? Is it the last trade? The VWAP?
The stock market only tells you where shares have traded and where the order book would trade them. There is no observable "actual price."
A useful way to think about the price is to imagine a theoretical fair value that is always changing, and a theoretical bid/offer that is always floating around the fair value.
This theoretical fair value is not posted anywhere. Some people give the name "price discovery" to the process of identifying where the theoretical fair value lies. With liquid stocks like AAPL on calm days, price discovery is a simple affair. With other assets, price discovery can be more opaque.
When the stock is trading steadily at high volume, then sure. The last trade is a great representation of the theoretical fair price. But in choppy trading, when there are dislocations between related assets and spreads are wide? The last trade is not representative of the whole picture.
Consider assets whose transactions must be reported to TRACE. If you are long, you have an incentive not to sell aggressively because a downtick will mark down the value of your position. So what's the fair price? Is it the last trade? Not necessarily, because that trade may not represent the current state of the market.
Also, there is generally some illiquid trading taking place pre-/post-market. And US futures trade overnight in other markets. And companies may be exposed to assets that trade outside of US trading hours (eg, refiners that have storage tanks full of crude, or companies that have currency exposure).
> “There’s a reason why they have those circuit breakers -- it’s to give people time to come back from panicked feelings,”
Seems strange that the market is kinda able to be manipulated like that. I'm not saying this is a bad move, just surprised that someone can do it.