
Traders question value of stock-market circuit breakers - JumpCrisscross
https://www.wsj.com/articles/traders-question-value-of-stock-market-circuit-breakers-11584351001
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seanhunter
Contrary to what this article and other news sources seem to think, the
purpose of "circuit breakers" (usually called intraday volatility breaks
actually) is not to stop anyone from losing money or even to stop price falls
from happening. It's to get to a functioning market with a market price that
is reflective of the consensus opinion on available information as efficiently
as possible without too much thrashing around.

So what they actually do is not "suspend trading" as is often stated, but
suspend order matching. Orders can be placed in the book and are matched at
the end of the suspension via an auction process (all the buys and sells that
have price limits such that they can be matched off) are matched at the end of
the suspension (usually at a single auction price print) and then continuous
trading resumes.

This is essentially the exchange pausing "exchange time" so everyone can
position and then resuming it again, and is exactly the same matching process
that happens at the beginning and end of each trading day (and iirc after
lunch in Japan) to help the market price reflect the consensus of opinion of
the information that came out overnight while markets where closed.

There is a reasonable line of thinking that continuous trading is somewhat
overrated and some research advocates for matching to be done entirely through
auctions. So say for instance you have 1 auction per minute throughout the
day.

~~~
kqr
I almost understand this, but not quite. The reason is likely that I lack the
prerequisite understanding of what constitutes an order, how it's different
from a limit order, and so on. Either way, I would like to understand it
better because they way you put it makes it sound rather elegant.

This feels like something that could be very intuitively explained with
visuals. Does anyone know of such a visual explanation of this?

~~~
thedudeabides5
Good question, but I haven't seen any.

The core concept is that there are a bunch of folks that more or less promise
to either post bids (promises to buy) or offers (promises to sell)
continuously, and for that promise they (sometimes) get special treatment as
'market makers.'

In an orderly market, there are _both_ bids and offers for every instrument.

A market maker (or really any market participant) desire to participate in the
market is a function of a) the rest of their portfolio (whether they are net
'long' or net 'short') and b) their expectations of when and at what price
they can unwind the trade if they get 'hit' on their bid (aka someone sells to
them at their posted price) or 'lifted' on their offer (aka someone buys from
them).

When markets are moving 5-6% an hour, it becomes almost impossible to have any
certainty on a) what the rest of your portfolio really looks like and b) when
and at what price you might be able to unwind a particular trade.

This results in market makers (and HFT, and other market participants)
basically exiting the market.

When people say the 'bid-offer spread is wide' this is usually what they are
referring to. All the usual players basically take a step back and say 'too
rich for my blood' and then you have wide markets, and 'risk premiums' for
assets all over the place.

Circuit breakers are an attempt to slow time down to give people a chance to
understand their portfolios better, and hence return to the market. Wide bid-
offers represent highly profitable market opportunities, if the market is
orderly.

When it's not, you get stuff like an ETF on US government bonds trading as a
steep discount to the 'intrinsic value' of the underlying bond portfolio.

Aka chaos.

[https://ycharts.com/companies/TLT/discount_or_premium_to_nav](https://ycharts.com/companies/TLT/discount_or_premium_to_nav)

~~~
Simulacra
The Dude, ladies and gentlemen. Very nicely said.

------
geerlingguy
Traders question the value, but what about investors? It seems like a good
idea in theory, at least—give the markets a little breathing room before
trillions of dollars vanish into the ether in minutes.

I'd rather there be circuit breakers than risk the markets losing 50% in one
day, which seems possible in a panic selloff.

~~~
devit
Nothing is lost or vanishes, it's just a change in the ratio at which people
are willing to exchange two assets.

~~~
altcognito
Nothing except your ability to procure new investment capital, borrow to pay
wages which may or may not include premiums for health care.

~~~
bluGill
None of that should be tied to the stock market. That has been advice from all
the experts for ages. Even the strongest stock advocates have said the stock
market it for long term savings.

~~~
CrazyStat
If you are a publicly traded company it's impossible for all those things to
not be tied to the stock market.

------
neonate
[https://archive.md/CJJGX](https://archive.md/CJJGX)

------
Hitton
I think that in age of automated trading it's very important. You can't be
sure there won't spontaneously emerge some freakish occurrence which will make
bots trade in such degenerate way that it will send markets tumbling; without
stopgap measure it could be disastrous.

~~~
murillians
That is exactly why they implemented these circuit breakers
[https://en.wikipedia.org/wiki/2010_flash_crash](https://en.wikipedia.org/wiki/2010_flash_crash)

~~~
sirmoveon
It was hypothesis and later proven incorrect. Some even argue algos helped
minimize the turmoil.

In the pre-automated era I can see circuit breakers working in a constructive
way for the markets. These days, with trading being mostly automated and
algorithmic, to me it feels more like a bureaucratic tool to give government
institutions some time to play the markets.

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dsfyu404ed
>Published March 16, 2020 5:30 am ET

>The mechanism, which some complain does little good, was triggered twice last
week during a coronavirus-fueled selloff,

Well that headline went out of date real fast.

For those that don't know, the breaker triggered again at 9:30:01 (time
according to CBOE) this morning.

~~~
throwanem
The DJIA has dropped another 2% since the 15-minute pause expired. We might
see trading shut down for the day.

------
loopz
No real solutions until credible leadership takes charge.

For example: [https://www.who.int/emergencies/diseases/novel-
coronavirus-2...](https://www.who.int/emergencies/diseases/novel-
coronavirus-2019/media-resources/press-briefings)

------
decentralised
Mmmh... I was a CTO at a crypto-exchange which as everyone knows don't have
circuit breakers.

The amount of emails we received from customers complaining they lost a lot of
money while they were asleep was part of the reason I left, and now also part
of the reason I think whichever traders WSJ interviewed (can't see article bc
it's paywalled) are wrong.

~~~
btbuildem
Currencies trade 24x7, and somehow that works just fine.

~~~
decentralised
It doesn't work just fine at all. I could tell you plenty of stories and
industry insights but I'll leave you just with one nugget I got at a market-
maker conference last year: not even 20 cryptoexchanges are profitable, and
this information comes from those who are paid to make markets.. move.

edit: I think maybe you were referring to ForEx currencies only.. well,
there's a difference between a broker and an exchange and I'm constantly
surprised traders don't know this.

PS: I worked at Euronext too (many years ago)

------
egypturnash
“We need to be able to make value evaporate as fast as possible,” said Bobby
Blick, a trader at Opportunity Traders LLC. “It’s just insulting to not be
able to get our commissions off of this huge volume of panic sales.”

~~~
gruez
I highly doubt that circuit breakers put any meaningful dent on trade volume.
If anything, they're merely delayed until the markets reopen.

------
llcoolv
Well those circuit breakers are the same thing communist governments used to
do with the Berlin Wall, etc. It is just that this time it is the investors
and not the citizens who are banned from abandoning ship.

And as the entire stock market is based on trusth, the long-term and even mid-
term results are horrendous and totally not worth it.

------
AznHisoka
Instead of circuit breakers, why not:

1) Forbid any trading of stock futures. To me, reading about stock futures
reaching circuit breakers would invoke panic and the need to sell as soon as
the market opens. Let the market open at 9:30 EST, to whatever price the
market feels is appropriate at that time. Do not give them a clue as to what
it can be. Let the market decide for itself.

2) Forbid short selling. I feel most of the selling is done by long-term
holders, but short selling does excacerbate the situation. I'm in favor of
forbidding short selling forever, let alone in a crisis, as it's an artificial
technicality of the market. You can't short sell houses, or your possessions,
right? So why can we short sell stocks (if you want to hedge, go buy put
options)? I sure as heck didn't give anyone the right to borrow my stocks and
sell it. It's mine - I own it.

~~~
dtwest
1) Why? Futures do not prevent the market from "deciding for itself". Global
equity markets don't just trade on New York time. Getting rid of futures would
not fix the problem you are trying to solve, while creating many new problems.

2) If short selling actually did exacerbate the situation, wouldn't that
create a buying opportunity for other market participants? In reality, short
selling does not systematically force markets to price things incorrectly.

~~~
AznHisoka
1) I'm not sure about that. I think any pre-market activity influences the
price it trades at during the day. For example, if a stock goes up 10% up pre-
market because it beats earnings, it usually stays at that price level during
the day. Just because people see the price up in pre-market. Same if it goes
down. It acts as some sort of marker. It would be interesting to see how
prices would be impacted if there were absolutely zero pre-market activity.
For instance, if $SPY didn't drop 10% pre-market, and nobody put in any
bids/sells yet, would $SPY open at 10% down? If it goes down even more, then
so be it. At least, that's what the market wants. Not on an arbitrary marker
price they see in pre-market and is stuck in their mind.

2) I think short selling helps misprice stocks in both directions. It creates
artificial price increases simply b/c of shorts covering as well. Let stocks
go up because more people want to buy it than they want to sell. And let
stocks go down because more people want to sell than they want to buy. That's
what a market is for other assets - whether it's ebay, amazon, groceries, etc.
Don't let other technicalities affect the price.

~~~
dtwest
"For example, if a stock goes up 10% up pre-market because it beats earnings,
it usually stays at that price level during the day. Just because people see
the price up in pre-market."

1) No, it is not just because people see the price pre-market. It is because
it beat earnings. Futures are not an arbitrary marker price.

2) There is so much arbing going on that I don't agree with you.

~~~
AznHisoka
Fair enough, I respectfully disagree, but you raise some good points.

