Realist, not conformist analysis of the latest financial, business and political news

Shutting Stock Markets Is Damned Idiocy

The creators of money

Investors are panicking. The markets are in freefall. Companies are on the brink of collapse, and stock indices are flying in every possible direction. The coronavirus has created the biggest crisis the financial world has seen for a couple of generations.

By comparison, the collapse of 2008 is starting to look like little more than a minor tweak to the banking system, easily fixed with some printed money and a few emergency bail-outs.

There is, unfortunately, no simple solution to the medical emergency. There is, however, a relatively simple fix to the financial crisis. Simply close the stock market down for three months. Why?

The why there being that some damned idiot of a journalist wishes to write a column.

So, think it through. Say we closed the markets two weeks back. Aston Martin would now be bust. Because Aston launched a – fully underwritten – rescue rights issue last Friday. Without which it would indeed go bust. Can’t launch a rights issue if the markets are closed.

Sure, maybe Aston should go bust. But now extend that to the rest of the market. The primary purpose of a stock market being to – well, it’s to raise capital, isn’t it? And firms right now rather need to raise capital. So, we’re going to close the capital raising thingie just as people need to raise capital?

Idiot.

It’s entirely true that we don’t like what the markets are telling us right now. We’re all poorer as a result of the chaos. But then we are all poorer now. There’s a pandemic ripping through the global economy – we’re poorer.

He’ll be recommending price controls to limit black markets next…..

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Spike
Spike
1 year ago

Quite right, and for the same reason that Wall Street’s “circuit breakers” are lingering Bush stupidity. The stock market is a “price discovery tool.” Occasionally, few people want to buy something, except at a deep discount. That is a fact. The only issue is whether we will let others be informed of that fact, through a drop in the market price. Keeping our instrument on the shelf because we didn’t like the measurement it was reading is stupid.

Phoenix44
Phoenix44
1 year ago
Reply to  Spike

I have some sympathy with circuit breakers when HFT is so prevalent in volumes these days. Theres price discovery and theres algorithms that just react to sell.

Spike
Spike
1 year ago
Reply to  Phoenix44

All of them trading on their own account, and honoring their bids and offers, no? Then even an algorithm based on random numbers is not a problem. Even an algorithm that will magnify a panic either has to have authentic supply and demand behind it, or will cost its owner too much to ever be deployed. Imagine actually using a ‘bot programmed to liquidate at the bottom!

Phoenix44
Phoenix44
1 year ago
Reply to  Spike

I’m not sure HFT has authentic supply and demand behind it though? And as we have seen far too often, those cleverest people in the room sometimes aren’t, and what they have created does cost them everything. What we need to ensure is that everybody else doesn’t get destroyed with them, when the inevitable errors occur.

Spike
Spike
1 year ago
Reply to  Phoenix44

You missed my point: The trader who uses HFT or lets his pet dog key in the trades suffers when the trades overtake authentic supply and demand. The only way to ensure that others aren’t destroyed in a panic is to encourage the widest possible market. I was hunting for stock bargains today, and I didn’t care if the seller was a ‘bot stuck in an infinite loop.

bloke in spain
bloke in spain
1 year ago

Well, for a start, those stock market prices you’re talking about are not in fact prices. They’re bids & offers. Price is only discovered when something is sold from one entity to another. So how many shares have actually changed hands – remembering every sale must have a matching buyer? Answer. Hardly any. A few sellers requiring liquidity have offered stock to the market at reducing amounts to try and attract a bid & the current “price” is where that process bottomed out. Either it found a bid or that was the floor sellers were willing to take for the… Read more »

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