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Comment by gd1 | Hacker News Reader

You realize things keep happening while your volatility interrupt is in force right? Everything else in the world keeps trading. There is no guarantee when it starts trading again that it won't open 20% down. If you don't want a stop loss to trigger, don't place one.

Imagine you have a stop loss, which doesn't trigger, then the market vol interrupts, then the price opens 10% below your stop loss.

Oops, you'd be moaning about that instead.

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> There is no guarantee when it starts trading again that it won't open 20% down.

That's why I used the words "reduce the likelihood" instead of "eliminate".

As to the efficacy and benefits of volatility interruptions, research has been carried out on this - 'Price Discovery in European Volatility Interruptions': http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2365772

Monday saw the first ever limit down halts on major equity index futures (YM/ES/NQ) on CME Globex. It was an unmitigated disaster. It happened at a critical time (heading into the cash open), and caused chaos in the ETFs that have these futures as the underlying. Market makers price and hedge ETFs like SPY (the Spyder S&P 500 tracker) off the future. So being unable to do so since the underlying was frozen, they did the only thing they could naturally do and blew out their spreads and backed away. Even then, some unfortunate and panicky people crossed those spreads and some SPY changed hands at -14%. There is no legislating against stupidity.

Then when ES and the other futures did unfreeze, they promptly plunged to a second limit down in extremely thin trade. Why so thin? Because when you stop trading, everyone empties out of the orderbook, and they don't necessarily dive straight back in once it unfreezes. Liquidity gradually comes back as participants assess that the price is stable and they can start quoting again.

Monday was not a good day for your argument.

As it currently stands I don't think there's any guarantee that your stop-loss will sell at the price you've set anyway, rather than 10% or 20% or even more below it. The only difference is that right now it could cause all your shares to be sold for less than you expected because of a temporary market blip that lasted seconds.

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