Banking & Finance

Why an Extended Stock Market Halt Could Come From the COVID-19 Panic

Would the exchanges tighten their trading halt criteria or make trading halts last longer? The current Level 1 halt has been to cease equity trading for 15 minutes if a drop of 7% or more occurs on the S&P 500, compared with the prior day’s close. A Level 2 halt occurs if the S&P 500 then falls to 13% from the prior day’s close, also with a 15-minute halt. With a level 3 halt, the stock market closes for the day if there is a drop of 20% from the prior day’s S&P 500 close.

As for the duration of the halts, there could be a case now that, with lock limit down futures trading having been seen in recent days, a 15-minute delay may not really be enough time to do much of anything. Do those 15 minutes really give the public enough time to decide whether to hit the buy or sell buttons right at the open or in the middle of their workdays? The exchanges could move to say that if the lock limit down was in effect that it could create a 30-minute or 60-minute halt to allow more time for cooler heads to prevail.

Would the equity exchanges and regulators think that the two worst trading days in history outside of the 1987 crash happening in March of 2020 is actually a good thing? Assuming they do not, then the rules could be narrowed during this time of panic to where the halts occur for longer and with incremental levels of 5% down. That would be similar to what happens in futures overnight, followed by halts at 10% down and then ultimately 15% down. There is even a case those levels could be pointed down to 4% or even 3% limits until the financial markets stabilize.

Is there really a serious and rational argument that a crashing stock market doesn’t matter to the general public, just because of the theory that “only the wealthy are invested” in stocks? If employees work for big companies, they ultimately have to care about the stock market, whether they want to or not. Those employees have 401(k) and IRA retirement assets that invest in stocks, and the few companies that still offer a pension simply cannot get the returns they need solely investing in bonds. There is also the notion that if their company is in trouble or thriving, the share price can dictate some of the mood and behavior inside a company or around employees wanting to join or move on.

The recent rise of Robinhood as a free trading app used by millions of millennials should also throw out the idea that the masses cannot or do not want to invest in stocks. According to that company, millions of younger investors have joined its ranks. Hint: people didn’t join Robinhood just so they could buy certificates of deposit or Treasuries.

What about the notion that short sellers have to be allowed to participate equally in the stock market? It is true that for every time there is a short sale there is also a buyer of stock. Even the most critical of outsiders who analyze the markets probably can get to a point that short sellers have to be allowed in a market over time. Still, extending the duration of halts or lowering the criteria for trading halts would not exactly be a deathblow that prevents short sellers from participating in the markets. Short selling parameters were even set up during the financial crisis to try to prevent the bank stocks from imploding.

Before thinking this is just bull market-rigging heresy, consider that the market having dropped 10% in a single session only a handful of times might support narrower and longer halts. It may even support a halt until the dust from the coronavirus settles.

Again, having the two worst trading days since the 1987 crash take place in two of the past three trading days should spell out that the situation has changed rapidly for the worse.

At the end of the day, the general expectation is that the value of stocks and the stock market indexes rise over time. Only the most aggressive short sellers and most extreme socialists are fans of the market falling apart. Rules are already in place to prevent financial market mayhem from getting too bad in a single day or even in a group of days. Slowing the pain and allowing the markets time to stabilize, if enacted properly and with serious thought, might end up being a better alternative than allowing trillions of dollars in losses to keep going against the investing public at the rate we have seen.

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