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What happened to the stock market today?

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Navy Times editors note: US stocks dropped today despite the Federal Reserve shock, the move to cut interest rates to near zero. Or perhaps it was because of the federal government's decision, which was designed to consolidate a fragile economic situation as the global coronavirus pandemic continues. It was the second drop in emergency interest rates in as many weeks. The markets have interrupted their trading several times today after prices have dropped below benchmarks. Fortunately, were part of a service which provides smart experts to understand what's going on and what the authorities could do to fix it. Take it away Dr. Jonathan T. Fluharty-Jaidee.

1. What measures prevent a free fall in prices?

Most financial markets all over the world, what are called circuit breakers that trip when overall prices drop by a certain magnitude.

For example, if the Standard & Poors 500 index price drops 7% since its previous closing, trading of all stocks on the two main US exchanges, the New York Stock Exchange and NASDAQ, has been suspended for 15 minutes. If it drops an additional 6%, trading stops for an additional 15 minutes. If the S&P 500 drops another 7% for a total drop of 20%, trading stops for the day.

A 7% drop has occurred several times in the current crisis, most recently just three minutes of negotiation on March 16 according to federal reserves surprise decision to lower interest rates to almost zero.

In addition, there is something called upper limit, lower limit, which sets upward or downward limits on stocks, exchange-traded funds or futures over a period of five minutes before triggering a temporary halt in trading in this security.

This rule was created in response to the so-called crash flash in may 2010 in which a single algorithmic exchange led to an intraday drop of 1,000 points in the Dow Jones industry average at the time of a market value of approximately $ 1 trillion.

Crowds gather outside the New York Stock Exchange after the crash of 1929. (Pacific & Atlantic Photos, Inc., now at the Library of Congress)
Crowds gather outside the New York Stock Exchange after the crash of 1929. (Pacific & Atlantic Photos, Inc., now at the Library of Congress)

2. Have these measures already been initiated?

The American markets began to implement circuit breakers in 1988 after the Black Monday crash on October 19, 1987, when the S&P 500 fell 22.6%. The goal was to reduce overall market volatility.

The first and last time the US markets hit the breaker before this year was during the Asian financial crisis October 27, 1997.

This shows how rare price variations of this magnitude are. Neither the 2000 dot-com crash nor the 2008 financial crisis set off a circuit breaker.

3. Do they work?

It depends on what we mean by work.

Their destination was to stop a deluge of traders selling assets at increasingly low prices to exit before the total market collapse and, in fact, contribute to that collapse.

This type of fear race in the markets is dangerous: if no one takes the buying position, it becomes a race to the bottom.

Since circuit breaks are rare and we don't have a lot of events to do, it's hard to say how effective they are. But so far, with each trigger, stocks have rebounded the next day. It is What happened in October 1997, and when the circuit breakers were tripped on March 9 and 12th of March of this year.

This suggests that they have successfully stopped the sale of panic at least temporarily. They are not intended to prevent markets from continuing to fall. And research shows that circuit breakers can actually increase market volatility in the days and weeks that follow. This means that even if prices rebound the day after trading is stopped, the markets are experiencing greater price fluctuations over a longer period of time, which is generally considered a bad thing.

And just because stops have led to rebounds in the past doesn't mean they will continue to do so.

A security guard wearing a mask as a precaution against the new coronavirus stands Monday at the Bombay Stock Exchange building in Mumbai. TheS & P BSE SENSEX closed at 31,390.07 on Monday, down -2,713.41 points. This marked a 7.96% drop in market value as fears of a coronavirus pandemic shook the global financial markets. (Rafiq Maqbool / AP)
A security guard wearing a mask as a precaution against the new coronavirus stands Monday at the Bombay Stock Exchange building in Mumbai. TheS & P BSE SENSEX closed at 31,390.07 on Monday, down -2,713.41 points. This marked a 7.96% drop in market value as fears of a coronavirus pandemic shook the global financial markets. (Rafiq Maqbool / AP)

4. So why not just close the markets for a while?

The President has the power to close markets in response to a crisis such as the COVID-19 pandemic.

In fact, the markets have been closed several times due to war, victory, death of presidents, celebration of important historical events such as the moon landing and natural or man-made disasters.

For example, the NYSE closed for three days following the September 11 terrorist attacks and closed for two days for Hurricane Sandy in 2012.

the longest stop ever was during the First World War, when the NYSE closed for four months starting in July 1914.

Normally, however, the market remains open as much as possible, even during periods of financial crisis, and the direction of each trade is responsible for determining whether or not there will be trades on that day. The government, however, broad powers to regulate trade during national emergencies, which includes the possibility of ordering a stop.

New York Stock Exchange traders listen to President Donald Trump's televised speech on the COVID-19 pandemic on Friday. (Mark Lennihan / AP)
New York Stock Exchange traders listen to President Donald Trump's televised speech on the COVID-19 pandemic on Friday. (Mark Lennihan / AP)

5. Should President Donald Trump order one?

There is actually no research I know of on the effectiveness of stock market closings during crises. But it is important to understand that even when the markets collapse, investors generally prefer that they remain open so that they can continue to trade.

In addition, the United States occupies a prominent place in the financial world as a strong and active market for securities trading. If the market is closed for too long, or for capricious reasons, this may give the signal that the US markets are not free from government intervention and that they are not reliable.

While temporary trading interruptions give market participants time to analyze information and make more balanced decisions, a halt could do real damage to U.S. investments in the long term if they are seen. as less of a paradise for global investors.

Dr. Jonathan T. Fluharty-Jaidee is assistant director of the department and assistant professor of finance at University of West Virginia. His interest research include corporate finance, CEO behavior and compensation, banking and financial institutions, dividend theory and risk taking and operator behavior.

On Saturday, David Storey processes samples for a COVID-19 coronavirus test in the laboratory services division of the Colorado Department of Public Health and the Environment in Denver. (Hyoung Chang / The Denver Post via AP)



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