Circuit breakers aren’t broken, it’s just that shutting down trading to control prices is bound to make things worse.
China’s spectacular week of trading is an illustration of how far authorities have yet to go in understanding what’s involved in running markets. The long-term answer is better technology with more diverse participants that know how to use it, say experts.
To briefly recap: yesterday the currency fixing was cut by half a percent, the largest change since the yuan was devalued in August. That led to tumbling equities, which breached the 7% stop gap. Less than a week into 2016, that’s happened twice.
The global repercussions are still being tallied, but in its latest update, systematic trading fund r-squared macro reported US, European and UK equities dropping 2.6%, 1.7% and 2.0% respectively. After a grim start to the year, oil prices extended their declines another 3%. In response, the euro, yen, and Swedish krona strengthened significantly as investors sought safer assets, the fund wrote.
The stopgap measure was meant to prevent large swings in equity markets, instead it may have made things worse, experts have warned. It seems China’s central bank may agree with that sentiment, as it ultimately suspended the shiny new circuit breakers, installed earlier this year.
Afterwards, China’s markets stabilized, which begs the question: why were the circuit breakers not fit for purpose? One answer is that the mentality underpinning their use is about price manipulation not risk mitigation.
By contrast, circuit breakers in developed markets tend to be about checking the problems associated with technical malfunctions. Think: May 6 Flash Crash in the US, when free falling markets recovered in 15 minutes.
“Most of the reason for (circuit breakers) in Western markets is to give everyone a chance to draw their breath, and ask is there a real reason for this happening? Or do we suspect that someone’s technology has run amuck?” said Steve Grob, Director at Fidessa, a technology provider.
Moreover, if market participants wanting to sell know they will get shut out of the market when certain levels are triggered, it will just exacerbate the decline as everyone rushes for the exit.
“The minute you have this sort of black-and-white, blunt instrument, it was bound to probably create the problem it did,” Grob said. “It’s also exacerbated by the fact that China doesn’t have electronic Market Makers.”
Electronic market makers generally thrive on periods of high Volatility. Firms like Virtu Financial, one of the largest HFT players in the world, have made inroads to China but in commodities trading via a partner, according to media reports. At the moment, China’s playing field is filled with large institutions and “a whole mass of relatively unsophisticated retail players”, Grob added.
Fidessa's own clients include Guotai Junan Securities, China Merchants Securities, China Construction Bank International Securities, Haitong Securities and Yuanta Securities.
Brokers in China number in the hundreds, many of which are encouraged by the Chinese government to internationalize. "The kind of technology they need to service institutional, international clients is completely different from what they need to run a retail brokerage in mainland China," he added. "They are all tooling up with much better trading technology."
The other challenge, he pointed out, is that of transparency and trust: “For stock markets to work, you have got to believe that it’s a level playing field and that it’s not going to dramatically change tomorrow.”
China’s spectacular week of trading is an illustration of how far authorities have yet to go in understanding what’s involved in running markets. The long-term answer is better technology with more diverse participants that know how to use it, say experts.
To briefly recap: yesterday the currency fixing was cut by half a percent, the largest change since the yuan was devalued in August. That led to tumbling equities, which breached the 7% stop gap. Less than a week into 2016, that’s happened twice.
The global repercussions are still being tallied, but in its latest update, systematic trading fund r-squared macro reported US, European and UK equities dropping 2.6%, 1.7% and 2.0% respectively. After a grim start to the year, oil prices extended their declines another 3%. In response, the euro, yen, and Swedish krona strengthened significantly as investors sought safer assets, the fund wrote.
The stopgap measure was meant to prevent large swings in equity markets, instead it may have made things worse, experts have warned. It seems China’s central bank may agree with that sentiment, as it ultimately suspended the shiny new circuit breakers, installed earlier this year.
Afterwards, China’s markets stabilized, which begs the question: why were the circuit breakers not fit for purpose? One answer is that the mentality underpinning their use is about price manipulation not risk mitigation.
By contrast, circuit breakers in developed markets tend to be about checking the problems associated with technical malfunctions. Think: May 6 Flash Crash in the US, when free falling markets recovered in 15 minutes.
“Most of the reason for (circuit breakers) in Western markets is to give everyone a chance to draw their breath, and ask is there a real reason for this happening? Or do we suspect that someone’s technology has run amuck?” said Steve Grob, Director at Fidessa, a technology provider.
Moreover, if market participants wanting to sell know they will get shut out of the market when certain levels are triggered, it will just exacerbate the decline as everyone rushes for the exit.
“The minute you have this sort of black-and-white, blunt instrument, it was bound to probably create the problem it did,” Grob said. “It’s also exacerbated by the fact that China doesn’t have electronic Market Makers.”
Electronic market makers generally thrive on periods of high Volatility. Firms like Virtu Financial, one of the largest HFT players in the world, have made inroads to China but in commodities trading via a partner, according to media reports. At the moment, China’s playing field is filled with large institutions and “a whole mass of relatively unsophisticated retail players”, Grob added.
Fidessa's own clients include Guotai Junan Securities, China Merchants Securities, China Construction Bank International Securities, Haitong Securities and Yuanta Securities.
Brokers in China number in the hundreds, many of which are encouraged by the Chinese government to internationalize. "The kind of technology they need to service institutional, international clients is completely different from what they need to run a retail brokerage in mainland China," he added. "They are all tooling up with much better trading technology."
The other challenge, he pointed out, is that of transparency and trust: “For stock markets to work, you have got to believe that it’s a level playing field and that it’s not going to dramatically change tomorrow.”
Institutional FX Demand Continues to Climb in April
Network, Learn, Grow | FMAS:24
Network, Learn, Grow | FMAS:24
Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
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Get ready to mark your calendars for FMAS:24, returning this May! Take a quick glimpse of what awaits at the Sandton Convention Centre in Sandton, South Africa from May 20-22, 2024.
Don't miss out on this 5-second invite packed with energy and urgency!
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
📣 Stay updated with the latest in finance and trading!
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Follow FMevents across our social media platforms for news, insights, and event updates. Connect with us today:
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Here's a sneak peek into the FMAS:24 vibrant atmosphere! Join us at Africa’s premium financial event for a transformative experience that combines the best of finance and technology.
From May 20-22, 2024, the Sandton Convention Centre in Sandton, South Africa, will be the hub for over 3,500 attendees to engage in unparalleled networking opportunities, learn from over 150 industry-leading speakers, and explore innovations from 120+ exhibitors.
Secure your free ticket now 🔗 https://events.financemagnates.com/yQx0l?utm_source=youtube&utm_campaign=fmas-is-back&utm_medium=video&RefId=FMAS24+Video+Ad+%5B1%5D
#fmas24 #fmas #fmevents #financeinafrica #traders #investors #affiliates #forexTraders #investmentOpportunities #B2BNetworking #finTech #Innovations #TradingCommunity #BusinessOpportunities #AfricanBusiness #Johannesburg #southafrica
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Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 | Africa's Premium Financial Event
Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
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Looking to expand your network in #Africa? Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
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Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Join 3500+ Attendees at FMAS:24 - Africa's Premium Financial Event
Looking to expand your network in #Africa?
Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
Looking to expand your network in #Africa?
Join 3500+ attendees at FMAS:24, where online trading, fintech, payments, and crypto meet! Connect with industry leaders and innovators for an unmatched networking experience.
20-22 MAY 2024
Sandton Convention Center, Sandton, South Africa
Register now to secure your spot: https://bit.ly/3JbUpCK
#fmas #fmas24 #fmevents #networking #finance #africa
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Where the Prop Trading Industry Goes from Here | Finance Magnates Podcast
Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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Explore the tumultuous world of prop trading in this Finance Magnates podcast episode, featuring insights from Head of Axi Select, Greg Rubin.
We're discussing the challenges and shifts caused by MetaQuotes' pivotal decisions affecting MT4 and MT5 users, and how Axi Select offers a unique, realistic path to professional trading, steering clear of traditional prop firm pitfalls.
Tune in for expert analysis on the future of trading and innovative funding models.
The Axi Select programme is only available to clients of AxiTrader Limited. CFDs carry a high risk of investment loss. In our dealings with you, we will act as a principal counterparty to all of your positions. This content is not available for AU, NZ, EU and UK residents. For more information, refer to our Terms of Service. Standard trading fees apply.
This content is provided solely for general informational purposes and should not be construed as financial product advice or an investment recommendation. It has been prepared without considering your personal circumstances.
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