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New "Circuit Breaker" Imposed To Stop Market Crash
Lucas123 writes "The SEC and national securities exchanges announced a new rule that would help curb market volatility and help to prevent 'flash crashes' like the one that took place on May 6, when the Dow dropped almost 1,000 points in a half hour. That crash was blamed in part on automated trading systems, which process buy and sell orders in milliseconds. The new rule would pause trading on individual stocks that fluctuate up or down 10% in a five-minute period. 'I believe that circuit breakers for individual securities across the exchanges would help to limit significant volatility,' the SEC's chairman said. 'They would also increase market transparency, bolster investor protection, and bring uniformity to decisions regarding trading halts in individual securities.'"
What happened on May 6th was that sell orders were present without matching buy orders for an instant, and that allowed some really wacky trades to complete... nearly every Dow and S&P 500 component was affected, and some ETFs even traded for a penny a share for that brief instant. Then when news got out that there was bargains to be had, the buy orders started showing up and things returned to a run-of-the-mill down day.
Now, the NYSE and NASDAQ have always had this circuit breaker rule that allowed them to call a "time out" where they wouldn't process orders in order to draw attention to the wacky situation and give all involved time to react. The problem is that these new "market centers" allow trades to be completed rapidly, but also without the same oversight rules. While the big exchanges had the time out in effect, orders simply routed around them and the wacky drop continued. So, now the SEC is taking the NYSE/NASDAQ rules and making them their rules, so all the new players have to observe the timeouts. That should fix this problem.
The stock market has no basis in reality. They like to pretend it does, but it doesn't. There are all sorts of excuses and 'reasons' why it does, but it has no more basis in reality than paper currency.
The first part of statement was wrong. Then when you said your bit about paper currency you confirmed the fact that you simply don't understand economics. Instead, you're another gold standard guy enthusiast. I'm going to explain to you why that's not a good thing.
The price of gold is set by the quantity of gold available and the demand for it, as is everything else. Since the total quantity of available gold isn't related at all to the production in any other industry, that's a really poor measure of the economic status of any one nation.
Paper currency is easily manufactured, but the guy who makes it isn't guaranteed to win anymore than everybody else is guaranteed to lose. It's called supply and demand. If you print too much of it, you have inflation, and the paper will soon be worth nothing. If you take money out of circulation, you have deflation, and the paper is worth more. Consequently, that's exactly the same situation you have with gold. If we start mining a whole lot of gold, the price of gold comes down and you can exchange it for less things. If you start producing less gold, the price goes up, and you can exchange it for more valuable things. The value of everything in relation to everything else is constantly fluctuating, and you don't make it "stable" or more "real" by having a mineral or a very difficult to manufacture thing as your currency. It's all the same. If we suddenly print ten times more money than we currently have available, assuming everything else stays the same, the cost of everything product will go up because the people with that extra money in hand will be willing to spend more, people's salaries will go up, because employees will demand more money to compensate for the increased price of goods, and now everything you could buy with a $1 bill you buy with a $10 bill. But it's ok, because your salary will have gone from $70,000 / year to $700,000 / year. It's exactly equivalent and no actual value was lost anywhere.