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.