Visualizing What Happens To Trading During A Market Crash?

Tyler Durden's picture

It’s hard to predict when a stock market crash will occur, so the best defense is to be prepared.

Today’s infographic comes to us from StocksToTrade.com, and it explains what happens when a large enough drop in the market triggers a “circuit breaker”, or a temporary halt in trading.

Courtesy of: Visual Capitalist

As Visual Capitalist's Jeff Desjardins notes, these temporary halts in trading, or “circuit breakers”, are measures approved by the SEC to calm down markets in the event of extreme volatility. The rules apply to NYSE, Nasdaq, and OTC markets, and were put in place following the events of Black Monday in 1987.

CIRCUIT BREAKER RULES

Previously, the Dow Jones Industrial Average (DJIA) was the bellwether for such market interventions.

However, the most recent rules apply to the whole market when a precipitous drop in the S&P 500 occurs:

Upon reaching each of the two first thresholds, a 15-minute halt in trading is prompted. This is the case unless the drop happens in the last 35 minutes of trading.

Upon reaching the third threshold (-20% drop in S&P 500), the day’s trading is stopped altogether.

CAN CIRCUIT BREAKERS STOP A MARKET CRASH?

In theory, the use of circuit breakers can help curb panic-selling, as well as limit opportunities for massive gains (or losses) within a short time frame. Further, by creating a window where trading is paused, circuit breakers help make time for market makers and institutional traders to make rational decisions.

Regulators and exchanges hope that all of this together will give investors a chance to calm down, preventing the next market crash.

But do circuit breakers actually work? While they make logical sense, recent evidence from China paints a murkier picture.

THE ILLUSION OF SAFETY

In Paul Kedrosky’s piece from The New Yorker, titled The Dubious Logic of Stock Market Circuit Breakers, he makes some interesting points on the series of market crashes in China from late-2015 to early-2016.

To understand why circuit breakers can make markets less ‘safe,’ imagine that you’re a Chinese trader on a day when markets are approaching a five-per-cent decline. What do you do?

 

– Paul Kedrosky, The New Yorker

Kedrosky continues by explaining that a market participant in that situation would try to get as many sell orders in as possible, before the circuit breaker is triggered.

Further, when the markets re-open, the same trader would again sell immediately to avoid the second breaker (which triggers an end in trading for the day). Each time the breakers get triggered, it creates a market memory of the events, and traders try to avoid future shutdowns by selling faster.

PREPARATION IS KEY

Whether they work or not, it is essential for investors to understand the rules behind circuit breakers, as well as how markets think and react after these pauses in action.

In the event of a market crash, this preparation could help to make a difference.

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The central planners's picture

This is like the regular week for coinbase.

targayren hous's picture

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silverer's picture

Where's your tax return you were asked to post?

2banana's picture

Circuit Breaker = the big Wall Street houses and the connected can get out while the rest of the serfs can deal with a "404 Error" page or their broker taking their phone off the hook.

Batman11's picture

It's pretty much like it's always been.

1600s Holland

These Tulip bulbs are rising in price, I can make money without working.

Sometime later.

These Tulip bulb prices are beyond all reason, PANIC.

Sell, sell, sell, ........

 

It's pretty much like it's always been.

Early 1990s - The following crises UK, Japan, Australia, Canada and Scandinavia real estate busts.

More recently – the dot.com bust; 2008; Irish, Greek and Spanish real estate crashes.

2008 is just another real estate bust, leveraged up and transmitted internationally by complex financial instruments. As the global bust hits the Euro-zone, it crumbles.

Economics works on the assumption investors are rational and prices reach stable equilibriums.

Economists are irrational.

Batman11's picture

2008 - "How did that happen?"

Economists working on flawed assumptions.

Don't expect them to see anything coming.

Mtnrunnr's picture

Bullshit. They knew exactly what they were doing. They also knew that the average joe mortgage analyst did not and that the average person was screwed, so they knew a bailout was coming. Every regulator wanted to fuck a banker or be a banker so they ignored the bad data and promoted the good data. Same shit now. Why do you think the SEC ignores all manipulation on stocks below $5? (And why tutes don't initiate coverage). It's all a bullshit circus.

Xena fobe's picture

Why don't they halt it on the way up? 

apadictionary's picture

way up??  if its stocks then not acceptable. If its precious metals then totally acceptable.

RawPawg's picture

A more Wise trader would see the writing on the wall,and just walk away

on the way home maybe stop by the store,pick up a few cans of food

yeah,i know...i'm crazy that way

Sky flyer's picture

I don't see the control-p used on that flow chart which stops the breakers before they are needed. What about the continued manipulation in bonds, bullion, dollar etc.?

indygo55's picture

They were in place in 2008. over a few months is still crashed. Its the basic fundamentals that are realized in the market participants minds. If the calls come in for redemption's then the markets will sell up to each point each day until the participants stop redemption s. Psychology is still a major factor. 

Scuba Steve's picture

Question: When does the PPT sell its holdings during the crash n breakers?

Yes, that was rhetorical.

Aussiekiwi's picture

I'm collecting newspapers they only make so many each day.

Let it Go's picture

Markets appear stable, however, being invested is always a risk. Most investors think that even if things go downhill fast that they will be smart enough to get out of the markets. After the debacle in 2008 where they saw the market take nasty and violent swings they learned a few things, this time, they figure they will make the right moves before it is too late. But what if it hits like the flash crash on steroids?

Imagine a scenario where the if the market falls like a flash crash on steroids investors are trapped. They have been assured that can't happen because circuit breakers have been put in place to arrest panic style moves but if trade is halted, and the market simply does not reopen for days or even weeks suddenly it is a new game. As remote as this might seem the article below explores this possibility and the far-reaching ramifications.

 http://brucewilds.blogspot.com/2016/08/flash-crash-on-steroids-makes.html

There's picture

AND... the clueless SEC will decide who's order gets back filled or not.

Soundgardener's picture

Algorithms are most of the market now, so most of the commentary here is irrelevant except to prove the clulessness of investors, given this is a supposedly informed, skeptical, critical, contrarian audience with a risk-averse bias (the clue's in the name of the blog there chums).

Now where's my crack pipe and porn: berating strangers relentlessly with a feigned air of "been there / done that" superiority requires a robust serving of delusional ego *whispering* especially when you're so wracked by anxiety and fear you haven't slept through a whole night since the last time you were sectioned for barking at the mo....

Oh FUCK, did I leave my hoot line open...guys? London?

Iconoclast421's picture

Mentally masturbating about circuit breakers during a period where the market isnt likely to lose more than 0.2% on any given day....

Soundgardener's picture

Unless you're fucking Merlin, or The Buddha or something, the whole idea of mental masturbation makes absolutely no....oh I GET IT. It's SUPPOSED TO SOUND STUPID.

Crap; now I gotta go back and read everything I read when I was stupider, in case I missed something else.

Ajax_USB_Port_Repair_Service_'s picture

O.K. so, that's two 15 minute coffee breaks and then we all go to the ballgame after the 20% threshold hits. Got it.

Barney08's picture

We don't need no circuit breakers!! Too the f ing moon!

RagaMuffin's picture

The fun part. The visuals refer to trading during the day hours, not the night session      ;-)

silverer's picture

A circuit breaker serves the purpose of introducing a way to halt an in-progress market correction, and allows investors to decide if it might be worthwhile to stay in the Ponzi because they feel secure it's all being "controlled". In fact, if we had real markets and basic valuation and not a unicorn system based on fog, there would be no need for "circuit breakers". A circuit breaker DOES NOT change company valuations, earnings, or balance sheets. Face it folks, it's a frigging CASINO.

Youri Carma's picture

Not mentioned here: Circuit Breaker - PPT steps in to save the day.

Uranium Mountain's picture

Because it can't panic pause going up or the Central Banks and the Fed wouldn't be able to save the markets by buying. 

There's picture

AND... the clueless SEC will decide who's order gets back filled or not.