Why the coronavirus won’t cause a serious market crash

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Why the coronavirus won’t cause a serious market crash
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From time to time, events trigger a market panic, and the coronavirus is no exception. However, recent events like the death of Iranian general Qasem Soleimani and Iran’s missile attack on U.S. troops haven’t caused any long-lasting impacts on the market. Thus, it stands to reason that the coronavirus won’t cause a market crash of any length either.

Why the coronavirus won’t cause a major market crash

Reuters noted that much trading is now down via computers and high-frequency algorithms, and computers are not susceptible to the emotions and other factors that drive human investors to buy and sell. Despite that, high-frequency algorithms have been blamed for so-called “flash crashes,” so the market does sometimes crash even with computers managing trades.

Recent events that once triggered major sell-offs for long periods of time no longer seem to have such a major impact on the markets, and Reuters argues that it’s because of computer-driven trading. The coronavirus hasn’t caused a market crash yet, although it has caused some jitters for some investors. And if the trend that has been occurring continues, there won’t be any serious market crash caused by the coronavirus.

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Reuters pointed out that there have been small pullbacks due to the death of Soleimani and Iran’s retaliation, but those market crashes only lasted for a matter of hours. Now with the coronavirus circulating, the world’s stocks are still hovering close to their all-time highs.

How do computer algorithms work for trading?

Stocks are being supported by some factors like continued easing by central banks and increasing savings, but automated trading methods are also having an impact. According to a survey conducted by Greenwich Associates, algorithmic trading’s share of the foreign exchange market has more than doubled to 27% over the last six years.

Trading algorithms trade at lightning speeds and around the clock with extreme accuracy and low costs. They also aren’t susceptible to the emotions that plague human traders. Algorithms can quickly scan the news headlines and make split-second decisions about whether to buy or sell.

One currency trader who understands how algorithms are used told Reuters that a computer that’s reading about the coronavirus will often buy stocks if it reads a headline like “500 new cases, 10 deaths” or sell if it reads something like “3,000 new cases, 200 deaths.” As soon as a news headline hits, a computer algorithm can decide to buy or sell.

Computers also have volatility triggers, which means they can stop trading when the market moves outside specified limits.

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