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If markets drop enough the losses could trigger a negative feedback loop where financial institutions automatically begin liquidating positions in order to obta

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.

nodesocket 11y ago
Want to thank you for the great reply.
jacobwcarlson 11y ago
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.
- nissimk 11y ago
  according to wikipedia, the chinese market circuit breakers operate on changes in both directions: https://en.wikipedia.org/wiki/Trading_curb#China 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 https://en.wikipedia.org/wiki/Short_squeeze
- schwaps 11y ago
  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 http://lexicon.ft.com/Term?term=risk-on,-risk-off
muddyrivers 11y ago
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.
- muddyrivers 11y ago
  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.
- crdb 11y ago
  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/speculativelimits/index.htm http://www.cftc.gov/industryoversight/marketsurveillance/spe...
deleted 11y ago
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nodesocket 11y ago

Want to thank you for the great reply.

jacobwcarlson 11y ago

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.

nissimk 11y ago
according to wikipedia, the chinese market circuit breakers operate on changes in both directions: https://en.wikipedia.org/wiki/Trading_curb#China 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 https://en.wikipedia.org/wiki/Short_squeeze
schwaps 11y ago
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 http://lexicon.ft.com/Term?term=risk-on,-risk-off

muddyrivers 11y ago

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.

muddyrivers 11y ago
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.
crdb 11y ago
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/speculativelimits/index.htm http://www.cftc.gov/industryoversight/marketsurveillance/spe...

deleted 11y ago

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