Eli5 – What does the halting of certain shares in the market accomplish, especially when the halting is done repeatedly?


Eli5 – What does the halting of certain shares in the market accomplish, especially when the halting is done repeatedly?

In: 4

Hysteria is real, and traders are emotional creatures. They have a tendency to get upset and overreact when something really bad happens. They can think things like, “If THAT company failed, I bet OTHER companies are failing too!” and start selling off stocks for companies that aren’t doing badly.

Then other traders see those sales and think, “Wow! I’m scared! That guy must know more than me, I bet all of my good-performing companies are hiding things from me. I’d better sell a lot TOO!”

Then other traders see those sales… and the cycle gets worse and worse.

This isn’t a new phenomenon. Most of the people who invented our economic theory pointed out “imbalances” can happen and the government has to step in to fix those.

So when something really bad happens, the government halts trading on shares that people seem to be panicking about. This means people can’t start a chain reaction of sales that harms a ton of companies that didn’t have a catastrophe. Usually once investors have had a little bit of time to look at the market, they realize, “Oh, it was just one company, and now that I’ve had time to see how other people react, I actually think BUYING some things is a good idea.”

If the catastrophe is very large-scale, a lot of things might get halted or trading might just stop. Every now and then someone has to stop and ELI5 the economy to the people who run it. One of the things they forget a lot is that the economy is a lot like Wile E Coyote: if we all agree to pretend it’s doing really well and invest money, it tends to do well. When we look down and realize the rug has been pulled, we fall to our doom. You’d think we would want people who understand ruining the economy will ruin the economy running the economy, but we reckon they wouldn’t be so rich if they weren’t pretty smart so we ignore it.

If you are a rational person at a stock exchange, and you notice irrational buying and selling of a certain company or group of companies, it is better to stop them from trading for the day than to allow that to go on and possibly impact other companies. People forget, a stock exchange is a real place, people go to them and talk to other traders and then buy and sell. When that happens people can get panicky and weird. The exchange, itself, is more neutral than the buyers and sellers.

Say you are that company, one of your competitors went out of business but your foundations are solid, the stock price of your company starts to crater and since you fund your business in part by selling shares and reclaiming shares very real cash flow problems can arise in a short amount of time. If they don’t halt the trading, you might miss a bond payment, or a dividend payment, or *something*, and then you look bad, and people start panicking on a new topic. In that case, it is to the benefit of everyone involved to halt the trading until cooler heads prevail.