Wall Street halts futures trading amid panic

Before Wall Street opened yesterday, American regulators suspended all trading of Dow Jones futures contracts, which had plunged. Such contracts allow traders to bet on the future direction of the Dow Jones index. The plunge had triggered an automatic circuit breaker, which halts trading to prevent a market sliding into freefall.

Okay...I can understand the logic that many 401k investments exist, and the reason for the "circuit breaker" is, PERHAPS, to diminish 401k losses (but I'm doubtful), as most 401k investments are managed by "investment firms" for a fee...

He said: “This morning, even before the markets in the US opened, the S&P futures fell by more than their daily limit. What I said yesterday has already started.”

Okay...regulators have daily limits for when the S&P falls...but, what happens when it goes up too much and creates an artificial profit? Is there a daily limit on increases? Nope...

And then many private (rich) investors (not 401k participants) engage in "proft-taking"...

And the market falls...

Oh...maybe that is part of the reason why we are in the financial jam we are suffering...

A forced closure of stock markets in America would respresent the first time that Washington would have shut Wall Street since the terrorist attacks of September 2001. It would also have echoes of the 1930s, when President Franklin D. Roosevelt shut American banks during an enforced holiday.

Hmmm....this is the SECOND time in this century, or within SEVEN years, that a forced closure was enacted...SINCE the 1930s...

All of these source snippets come from this article: business.timesonline.co.uk...

I was under the impression that the stock market, like a casino, involves taking a risk and reaping a benefit...

Would a casino manager come up to you and say "Hey, you have lost a lot of money, so we need you to take a break for awhile in the "luxury, big spender suite" we have given you and stop gambling, as you have reached your "loss" limit." Once you start winning again, then you can gamble...

Seems like regulators are mitigating the losses of the wealthy...

Just like our $700BN in tax dollars are mitigating the losses of major companies and still allowing the executives to receive their prohibitively substantial bonuses (many ANNUAL bonuses which equal MORE than an average American earns in a LIFETIME...)

So, is this fair?

The "halt" on trading futures Friday AM is a little misrepresented here.

When futures fall a to a certain level, it is known as reaching "limit down" or "lock limit." In Friday's case, the limits were DJIA at -550, S&P at -60, and NASDAQ at -85. When this happens, "sells" for lower amounts are the only thing halted. The number cannot fall any lower, but it can (and did, briefly) go up when people make buy orders for higher amounts.

Market day trading can be halted. If the markets fall a certain number of points during normal trading hours, all trades can be stopped on a short- or long-term temporary basis. This is known as tripping a circuit breaker. You can see all relevant numbers for the DJIA here.

Circuit breakers were put in place in the late 80s to prevent catastrophic plunges caused by panic selling. They're not there for the 401(k) investors; they're there for all investors. I'm not sure I understand your argument on this point. A 20% loss in a single day on any stock market is a terrible thing no matter who you are. The effects can and do spill over into other areas when a market as a whole plummets. The last, and ONLY, time trading-day circuit breakers tripped was in Oct 97. The 2001 closure was an entirely different situation - it wasn't caused by circuit breakers - and was not unique. The markets also closed after Pres. Reagan's death, when JFK was assassinated, and other major events.

There are no circuit breakers for precipitous increases in American markets, though there are in some foreign markets. The reason for this is because, well, a meteoric rise is a good thing for stock holders. If you held $1000 worth of stock and its value went to $2000 over the course of 6 hours, would you complain?

My understanding on the "circuit breaker" is to prevent self sustaining losses due to overwhelming bets on those drops in a circular fashion creating those losses, giving the markets time to "catch up" on those bets before another round.
But sometimes, I am an optimist.

Originally posted by swdecord
[
I was under the impression that the stock market, like a casino, involves taking a risk and reaping a benefit...

Would a casino manager come up to you and say "Hey, you have lost a lot of money, so we need you to take a break for awhile in the "luxury, big spender suite" we have given you and stop gambling, as you have reached your "loss" limit." Once you start winning again, then you can gamble...


So, is this fair?

I think what you meant is the casino manager would say "hey you have lost millions tonight so I have decided to loan you as much as you need until you make it all back and then some".

Originally posted by anachryon
The "halt" on trading futures Friday AM is a little misrepresented here.

When futures fall a to a certain level, it is known as reaching "limit down" or "lock limit." In Friday's case, the limits were DJIA at -550, S&P at -60, and NASDAQ at -85. When this happens, "sells" for lower amounts are the only thing halted. The number cannot fall any lower, but it can (and did, briefly) go up when people make buy orders for higher amounts.

Market day trading can be halted. If the markets fall a certain number of points during normal trading hours, all trades can be stopped on a short- or long-term temporary basis. This is known as tripping a circuit breaker. You can see all relevant numbers for the DJIA here.

Circuit breakers were put in place in the late 80s to prevent catastrophic plunges caused by panic selling. They're not there for the 401(k) investors; they're there for all investors. I'm not sure I understand your argument on this point. A 20% loss in a single day on any stock market is a terrible thing no matter who you are. The effects can and do spill over into other areas when a market as a whole plummets. The last, and ONLY, time trading-day circuit breakers tripped was in Oct 97. The 2001 closure was an entirely different situation - it wasn't caused by circuit breakers - and was not unique. The markets also closed after Pres. Reagan's death, when JFK was assassinated, and other major events.

There are no circuit breakers for precipitous increases in American markets, though there are in some foreign markets. The reason for this is because, well, a meteoric rise is a good thing for stock holders. If you held $1000 worth of stock and its value went to $2000 over the course of 6 hours, would you complain?

Regarding the "above" post...I had written out a "huge, 30 minute post," but it was lost as I was looking for "source" articles and was probably a result of me hitting the "back and forward" web browser button too many times...So, I guess what remained was the above post...Copied word for word...I do not intend to spend the time writing the post again...

However, I do want to thank "anachryon" for his/her well thought out and detailed post to my original post

Originally posted by TH3ON3
I think what you meant is the casino manager would say "hey you have lost millions tonight so I have decided to loan you as much as you need until you make it all back and then some".

Yep, kind of like our current tax payer funded $700BN bailout...

Nice

Originally posted by gotrox
My understanding on the "circuit breaker" is to prevent self sustaining losses due to overwhelming bets on those drops in a circular fashion creating those losses, giving the markets time to "catch up" on those bets before another round.
But sometimes, I am an optimist.

You may be right...My whole point is that an "artificial DJIA high" is just as bad as a substantial loss, thus a "circuit breaker" should be put in place for substantial increases as well...To limit "unsubstantiated gains" for the investors...October 2007 experienced the highest level of the DJIA, which was a little bit above 14,000...October 2008 saw the DJIA at it's lowest in years at around 8,400...

One year...and the market lost 40% of it's value...

Unfortunately, most 401k plans limit the number of times you can change your elections per year, and are you "NOT" able to react to the market on a "real-time" basis...Thus, although you are bragging while the market is going up, you can't make "real-time" changes when the market plunges...unlike "rich investors" who can change their investments in real-time...

Thus, an unrealistic "bubble" in the market is just as bad as a resetting of that bubble...Thus, a "circuit breaker" should be in place...

If you are investing in the stock market, and willing to receive a "substantial" gain, then why are you not able to accept a "substantial" loss?

Perhaps this is why social security hasn't ended up being used to trade in the markets?

Originally posted by swdecord
I was under the impression that the stock market, like a casino, involves taking a risk and reaping a benefit...

Would a casino manager come up to you and say "Hey, you have lost a lot of money, so we need you to take a break for awhile in the "luxury, big spender suite" we have given you and stop gambling, as you have reached your "loss" limit." Once you start winning again, then you can gamble...

Seems like regulators are mitigating the losses of the wealthy...

Probably the biggest misconception is that the stock market is like a casino. I dont know why people think it is the case. It is absolutely wrong. The stock market is a very well defined and logical market activity. Unlike a casino it is not purely a matter of chance. Unlike rolling a dice to determine your fate, your stock value is a result of many things that are quantifiable and understandable like the health of an enterprise, the market sentiment, external pressures and any external factors that are not factored into the market.

Stop loss is used to prevent panic selling. It is a prudent measure to gaurd against peoples fears and also allow for more rational thought to take hold rather than mere panic and fear. Besides, the notion that as the market falls people lose money is incorrect. Big firms that handle 401k's generally take delta neutral positions for a large majority of their portfolios (hedge themselves totally) from any market fluctuations so even if the markets fall or rise they dont loose money. Also the market has a downside limit while there is no theoretical upside to a market, thats why a downside circuit breaker is important.

Lastly, the idea that only rich people invest in the markets is a false impression, a LOT of middle class people actively participate in the markets. So the stock market is a preserve of the rich.

IAF101...

Thank you for the clarification...

Your explanation makes sense to me...

I have always regarded "risk" as "risk" and "gain" as "gain"

But, if all works as you say, well, the average investor is protected...

But, why do many friends complain to me daily of losing a significant amount of money?

Perhaps a Wharton education means little...but, the cries of the "average" Americans I converse with, make me think that the odds are stacked against them...

reply to post by IAF101


No, the markets are not like a Casino lol ..but I don't know if any of you have seen the farce Forex "systems" making their rounds.

Forex systems set up by the same Online Casino companies, with the same graphics, the same platform.

It's supposed to make it "easier" and to a degree I agree as Forex is pretty complicated. From my understanding an account with one of these .. er .. places .. generates a real Forex account at an investing firm, and you trade through the platform as a middle man.

Friend of mine pointed this out to me. Google ETORO .. you will be amazed.

It only really worries me that one day stocks could be traded like this...

reply to post by swdecord

The casino/stock market comparison doesn't fit that well: In casino gambling, you try to beat the system designed by an institution (the roulette, slot machines, etc.) The stock market is not such an institution; it's a place where the players congregate in order to make a buck by outwitting each other.

But if you make a race track/stock market comparison, you could account for some of the action you see in the stock market. Companies are like the racehorses and you bet on their performance. Well, there are certain differences, like the most important one: If you see your horse that you liked ($2000 across the board) being eased upon entering the stretch, your gimme-my-money-back dash to the window won't work, as opposed to the stock market where you can recover part of your plummeting self-confidence.

The circuit breakers are not effective against calculated, long-term maneuvers: The stocks shed 16.3 trillion since September 1 -- if the quoted source is correct about the figure. It would be nice if the tax payers could lend a helping hand to restore the good times, fat times, you know I've had my share . . .

Originally posted by IAF101
Besides, the notion that as the market falls people lose money is incorrect. Big firms that handle 401k's generally take delta neutral positions for a large majority of their portfolios (hedge themselves totally) from any market fluctuations so even if the markets fall or rise they dont loose money.

How is this true, when millions of Americans have had trillions of dollars wiped out from their 401k and retirement accounts with this year's decline?

Most retirement and 401k's give the option of allocation and thats how they work, you get a choice of several funds divided into categories as fixed income, large cap, value, emerging markets etc.

When the market goes down, people lose money, especially hardworking Americans who have 401k's and don't manage them as they should be and or don't really know how to. These finacial companies providing the accounts have their employes give advice as always take the "buy and hold strategy". One of the arguments against such as system is the market exposes to much risk for money required for retirement. Yes not all of the 401k are allocated to equities, but a significant amount usually is.

I think you are confusing pensions (which were the standard in the past) with 401ks of today.
[edit on 26-10-2008 by JJCv2]

[edit on 26-10-2008 by JJCv2]

[edit on 26-10-2008 by JJCv2]

[edit on 26-10-2008 by JJCv2]

JVCv2...

That was my thought as well...I'm sure individual investors (especially those who are inexperienced traders) lost a lot of money too, but to hear that 401k plans lost $2 trillion dollars is ridiculous...I may research how much money, from 401k plans, is actually invested in the market...

However, I do appreciate the posts explaining how the market works, as I have always contrubuted to a 401k plan and never managed my own stock market account...

Originally posted by JJCv2
How is this true, when millions of Americans have had trillions of dollars wiped out from their 401k and retirement accounts with this year's decline?

Most retirement and 401k's give the option of allocation and thats how they work, you get a choice of several funds divided into categories as fixed income, large cap, value, emerging markets etc.

When the market goes down, people lose money, especially hardworking Americans who have 401k's and don't manage them as they should be and or don't really know how to. These finacial companies providing the accounts have their employes give advice as always take the "buy and hold strategy". One of the arguments against such as system is the market exposes to much risk for money required for retirement. Yes not all of the 401k are allocated to equities, but a significant amount usually is.

I think you are confusing pensions (which were the standard in the past) with 401ks of today.

You see a few trillion dollars being wiped out is not a big number at all when you compare the total value of all 401k accounts in the US. Now the companies and way to invest your 401k depend on the Investment firm behind it and the options it provides but usually most of the companies try to tie up a majority of these 401ks into fixed income and hedge accounts, while a small portion of it is exposed to risk on the market. Now it is only this portion that tends to suffer from any risk or losses.

Now as to the "buy and hold" strategy, this is a time honored and wise strategy provided what you are buying is upto any good. If you buy and hold a company that makes horse carts, it isnt going to help you make money. So a buy and hold strategy depends on what you are buying and holding and at what price. If you buy a good company at a price that is above its actual worth then you can expect to see losses. The trick is what to buy and when to buy.

Most of the time the 401k money is put directly into buying equity, so when the value of the market falls, people generally loose money. However, in this thread we are talking about futures trading with 401k money. Now, in derivative trading(ie, futures, options, swaps etc) the fall or rise of the market is of less importance as to the actual market movement. So in future's trading a LOT of people would have made a LOT of money with the huge fall in the markets with their short futures positions. So when you are saying people's 401ks have lost money in futures trading, it is actually the investment firms that leveraged your money too heavily one way or the other and thus lost the money. Essentially, you hand over your money to them to invest as they see fit and thus these kind of things happen. A few billion dollars are lost and earned every day in the US stock markets when the markets are doing well. Its not surprising that in the downturn a few trillion or so would be lost.

reply to post by Rockpuck


I know what you mean by the Forex trading things.

Yes, there are more user-friendly stock trading programs too that are quite similar to the forex trading programs that you are talking about. However they are not as simple. These programs are usually used by day-traders to buy and sell stocks on the fly. It is quite profitable and also quite risky. The program essentially tells you in real time when to buy, when to sell and what to buy similar to the forex trading programs.

This is not a scam or anything close to gambling. The problem is that in an effort to generate more clients, these companies over simplify the risks involved and the market mechanisms. These companies earn money when people buy and sell over their programs, so it doesnt matter to them if you make a buck or not. They make money regardless.

Actually if you read their agreements, you will realize that they expect you to understand all the underlying risks involved in trading and the market mechanisms before you sign up with them. So, any trades you make are at your own discretion.

Pardon my lack of knowledge on the subject here, but I just noticed that the markets froze about 15 min or so before the end of the day on Friday. I cant believe I didnt notice it Friday honestly.

Anyway, I was trying to find out why.

The links you gave talk about futures being halted that morning before the markets even opened. So, why is it that the market stopped when it did, and why is this not in the news????????