Market Circuit Breakers

Market Circuit Breakers

What are the reasons behind the recent circuit-breakers in the US equity markets? The definition of such mechanisms by IOSCO offers an insight into the underlying market functioning shown below:

“Trading interruptions are utilized in all jurisdictions, most commonly in one of two sets of circumstances.

In the first, the trading interruption is designed (principally) to facilitate the orderly absorption by market users of new information material to the valuation placed on an issuer’s securities.

The second main set of circumstances in which trading interruptions are used occurs when there is an order imbalance, excessive volatility, or when there is some other indication of disorderly trading. In these cases, the trading halt generally provides time for supply and demand to rebalance at a new trading price .”

In the context of the above definition, the current use of circuit-breakers denotes order imbalance, excessive volatility as evidenced in the spiking in the value of the VIX and some sense of disorderly trading imbalance in supply and demand for securities.

A real-time persistence impact analysis reveals the followings points
— the reduction of price valuation of the US securities market, and the correlated equity markets
— the collateral value of all industry exposures in Dollar, impacting all Dollar based positions
— the benefit of all central bank reserves with exposure to US equity and bond market
— the real-time value of US Dollar reflected in the Dollar index
— liquidity in the repo markets evidenced through the recent announcements of the New York FED liquidity offering in repurchase agreements offering to market participants
— central bank monetary policy changes evident by rate cuts by the central banks and global fiscal stimulus

The above factors are due to tail risk. There is a need for a dynamic autonomous risk mitigation dashboard for every type of participants in all markets, to alert and help response appropriately in any given context of market volatility.

VIX Index

VIX Index

The index measures the market’s expectation of future volatility. Based on options of the S&P 500® Index, the CBOE VIX index is widely used in the U.S to gauge the market volatility.

So why do you need this in your portfolio, and why is it different from volatility?

As discussed in my previous post, volatility is ex-ante. On the other hand, the Vix index uses options of the S&P 500® Index to calculate the market’s expectation of future volatility. The Vix index is a leading indicator.

Click on the image below to view the interactive dashboard.

Data source : CBOE
VIX Index


The price of a security does not go up in a straight light. You may feel like you are on a rollercoaster. All your emotions are running wild the stock you bought is heading a different path to your expected path. Ah! this is the volatility I write about.

The prices swing up one day then down two days. Then you all reasoning is thrown out the window and you decide to close the positions that are causing you stress.

What is the measure volatility?

It is the standard deviation of the log returns on your portfolio, a stock price, an index or any financial instrument.

This is quite useful to understand the behavior and risk of an instrument. With this, you can calculate the expected return of a stock or portfolio.

Calculating volatility

View the code below to see sample calculations of a portfolio calculation in python. I have used data from yahoo finance. Please download the data if you wish to follow.

Future writings

Next we will look at the VIX index and explain why it is a more important and accurate measure of volatility.

Also In future posts we will see how we can incorporate these measures into our AI algorithm.

VIX Index


You have some spare money and are excited! You want to make this money work for you but you hear all the talk of a bubble coming soon you are worried. What will happen if you invest the spare cash? Will you make some money or will you lose it! This is uncertainty, this is a risk.

Risk is uncertainty. Uncertain your portfolio will return a profit. Risk is a very important topic in the financial markets and in the business world at large. Some risks are listed here.

  • Country risk
  • Systemic risk
  • Foreign exchange risk
  • Sector risk
  • Idiosyncratic risk
  • Political risk
  • Market risk
  • Credit risk
  • Liquidity risk
  • Company risk
  • Contagion
  • and many more…

When building your portfolio you need to be aware of the risks that affect the assets in your portfolio.

When managing a portfolio the quantifiable risk, volatility is the standard deviation of the portfolio return.

When analysing stock you have to remember that this is a time series. What this means is that you can carry out analysis on different time windows.

For example, Analysis of the daily return for one year, analysis of monthly return of one year or yearly return over 5 years.

How do we measure risk one way to measure risk is by using volatility.

VIX Index



In the financial sector an investment portfolio is a collection or basket of weighted set of assets. The holder has a finite amount of cash and wishes to optimise the profit of this portfolio.

How do you create a portfolio?

  1. Have money to invest in something
  2. A broker that can execute on your behalf this can be an online broker or one where you need to call to place orders
  3. Open an account
  4. Analyse and allocate percentage of your money to the shares you want to buy

Yahoo is a very good tool for building dummy portfolios. This does not send your trades to the broker. Below is a dummy portfolio to illustrate a portfolio construction.

How you select the stocks to put into your portfolio is a whole new discussion.

Suppose I had $14,000 in 2019, I decided to buy some stock. Having done some analysis I allocate a proportion of my capital to purchasing the stocks. Below is my percentage allocation and the date of purchase.

Dummy portfolio
Starting Capital$14,000
StockTrade DatePurchase PriceQuantityCommissionTotal Cost/sharePortfolio %

As of today this dummy portfolio will be worth just over $22,000 a rise year on year of 65%.

Note: For the purpose of this exercise all the stocks are in the US stock market and are denominated in dollars. There are no other asset type.

Asset Class

What is an asset class? This is the classification or grouping of financial securities which we can trade. Examples of asset classes are stocks , fixed income, commodities futures and so on.

An example of a stock is AAPL (Apple). AAPL is know as the stock ticker.

An example of a commodity is crude oil, Gold , pork belly etc.

An example of fixed income (bond) is the german bund 10-YR bond.

Knowing this is not enough to trade but it is a simple example.