Page 16 - Trading #101 Course – Part One: Trading Basics

TRADING #101 COURSE – PART ONE: TRADING BASICS /2017-10-06

Table 2.2 is geared towards giving you a head start in understanding the spectrum of
possibility regarding liquidity. But, by no means is this list meant to be a guaranteed
liquidity guide. Because the markets ebb and flow and will change, this table is meant
to give you a head start on understanding what the possibilities are and as a result
begin to think about how to prepare for these possibilities in your business plan and
model.

One more note about liquidity, speculators, traders and market makers all create
liquidity in the markets. These individuals are seeking to profit from anticipated
increases or decreases in market prices. By doing this, they provide the capital needed
to facilitate the liquidity. They generate revenue for themselves when they are on the
winning side of a trade. Their profits are the price that the world pays in order to
maintain adequate liquidity in the financial markets.

Zero Liquidity

There are rare occasions when you will be faced with zero liquidity, meaning there is no
volume at all because no one is able to trade. A variety of events can occur to affect an
exchange’s ability to function, including: snow storms, computer failure, hurricanes, Acts
of War, excessive volume, labor strikes and circuit breaker halts. When the exchange is
closed or halted, no one can place a trade, no matter how much they may want to.

Look at Table 2.3 which illustrates an action schedule for a new circuit breaker system
that was instituted by the NYSE in an attempt to slow down future market crashes.

Table 2.3 Circuit Breaker System That Halts the NYSE Trading Activity When
Market Drops Occur

Percent Drop in Market Time of Drop Trading Will Be Closed For:

10% drop Before 2:00 pm One-hour halt
10% drop 2:00 pm - 2:30 pm Half-hour halt

10% drop After 2:30 pm Market Stays Open

20% drop Before 1:00 pm Halt for Two-hours

20% drop 1:00 pm - 2:00 pm Halt for One-hour

20% drop After 2:00 pm Close for The Day
30% drop Any Time During Day Close for The Day

Chris Farrell. "Where are the circuit breakers?”
http://www.publicradio.org/columns/marketplace/gettingpersonal/2008/10/where_are_the_stock_market_c
ir.html

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