Newswise — Trading was suspended on the Chinese markets overnight for the second time this week. Shares in China fell by seven percent, triggering a "circuit-breaker" rule which is designed to stop panic selling. The trading stopped after just 30 minutes of trading, making it China's shortest trading day on record.
Martin J. Whitman School of Management Dean Kenneth A. Kavajecz offers some insights into “circuit breakers” and how they impact trading, based on his research.
“The Chinese central bank has devalued the Yuan, something it also did in August 2015. When an economy is weak, the easiest way to bolster it is to devalue the currency. As a result, global markets are now realizing the Chinese economy is weak and markets have sold off precipitately in the last three days.”
“Circuit breakers are an automatic trigger that activate when the market hits a certain percentage change in the index. Traders are desperately trying to sell off shares as quickly as possible, which draws trading toward the break point, or ‘magnet effect.’ It’s almost like yelling fire in a crowded theatre.”
“Chinese traders are calling for the end of circuit breakers, however they are a positive feature in markets, if they are set very wide. In other words, don’t set the break point zero but find a reasonable equilibrium.”
“We live in a global economy so now more than ever, what happens in the overseas markets affects everything we do, as well. I believe the reaction to the Chinese market situation is overstated. The U.S. economy is in pretty good shape. Multinationals that have production overseas may see more impact than fully domestic corporations.”
Dean Kavajecz is available for interview by contacting Kerri Howell, director of communications and media relations at the Whitman School, at 315-443-3671 or [email protected].
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