Why not just let them drop to zero? Doesn’t this interfere with the market?
In: Economics
Generally, temporary halts on extremely volatile stocks are intended to give everyone a fair chance to get caught up on any important headlines that may have influenced such a move.
Stop panic, over reaction. Mostly to protect investors, so companies/govt/stock exchange have time to explain. It gives time out to think through.
The market is not rational, it’s powered by human traders and their algorithms.
Imagine Netflix misses its earnings report by 3%. It dips a bit, but then people start to overreact. The stock dips 5% or more. Then people get scared and it starts to dive.
People sell Netflix stock because it’s going down, causing more people to sell Netflix stock. Soon, it’s people selling stock just so they can wait out the panic.
Uh oh, Amazon Web Services hosts Netflix. If Netflix is crashing, people start to sell Amazon as well. They figure if Netflix is going to crumble, Amazon is going to make a lot less money.
Oh dear, Amazon uses FedEx to send packages. If Amazon is crashing, it must be because they’re not selling as much. That means people holding FedEx expect the price to go down and start selling.
And the chain continues. This all happens faster than humans can learn about what is causing the dips. Traders get spooked and start selling *everything*. And now the market crashed.
All because Netflix missed earnings by a few percent. In a world where we halt trading, Netflix probably rebounds the next day to a more rational value and the chain doesn’t cause the next Great Depression.
It’s to protect the overall market. If a stock sees a large amount of volatility it can cause panic sell-offs that spread from the one stock in question to indices or the entire market.
Lots of good answers here, but the only time this has impacted me is when i was unable to sell while the price was high – so I think there is more to this answer than keeping society safe from panic.
They halt trading to give people who aren’t as able to react to market news instantly a fair chance to react and not get crushed when the stock goes to zero. It also gives the market a chance to think and not just react to a dropping price.
> Doesn’t this interfere with the market?
It absolutely does interfere with the market. ***And that is not a bad thing.*** We interfere with markets all the time, by preventing food makers from selling food containing too much arsenic, or by requiring people who have non-public knowledge to schedule selling their stock in advance. Regulation is a good thing when used judiciously and appropriately – too much can stifle a market, but too little and people get taken advantage of.
If a stock deserves to drop to zero it will with or without trading halts. The market is better when it is stable, you have smaller bid-ask spreads and it’s cheaper to execute transactions.
Before halting black Monday happened. It’s both for fairness and to stop spiraling automatic trades that could break the entire market
It is dangerous to not halt them because what may seem like just a momentary spike in activity could very easily have a chain reaction across the whole market. Market panics are very common but also very dangerous because what can be done in an instant cannot necessarily be undone just as easily. Increased trading activity also puts a strain on brokers and the back end infrastructure that facilitates trading in the first place. Since a lot of money is on the line, it’s better to halt trading than create a scenario where systems crash, causing widespread problems for the entire market, or orders go through that should not have gone through, or brokers reach a point where they cannot carry out proper order execution due to regulatory or fiscal constraints.
auto sell algorithms, top comment is correct, but itll be more than a person seeing red and panic selling. That initital sell off will trigger auto trade bots to sell, and itll be a chain effect til everything is wiped out
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