In the last few weeks, the stock market has hit a “circuit breaker” where stocks fell 7% in five minutes of opening so trading was halted. This is to prevent total collapse of the market as sell offs trigger sell offs due to panic. The initial sell off was due to panic over the coronavirus affecting supply chains.
My question is will you ever see a circuit breaker on stock rises? The answer is obviously no. Isn’t there a danger present? That we’re pumping a stock market higher than rational analysis dictates. At multiples of profit that we would never pay to buy a small business?
Shouldn’t there be a trigger in place that stops the hype from getting too out of control? After all, if you don’t overbuy then there is much less to crash.
This is a system that has one-sided protection. Like many of these systems, it creates something that people can exploit because now that my downside is covered, pumping the upside far more than rational analysis dictates is safer because if things spiral out of control without me noticing in just a few minutes, I’ll be notified that things are bad and be given a break period to correct it.
The systems in place dictate behaviors. Never forget that.