Why not just let them drop to zero? Doesn’t this interfere with the market?
In: Economics
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.
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