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A stock market crash is defined as a gradual decrease in stock prices over several months.
Answer: False
Explanation: A stock market crash is characterized by a sudden and dramatic decline in stock prices, not a gradual decrease over months. This definition aligns with the characteristics of panic selling and rapid price drops, as opposed to a slow market adjustment.
Stock market crashes typically occur during periods of low stock prices and investor pessimism.
Answer: False
Explanation: Crashes generally occur after prolonged periods of rising stock prices and excessive optimism, often following speculative bubbles, rather than during periods of low prices and pessimism.
A stock market crash is considered a social phenomenon due to the interplay of economic events and crowd psychology.
Answer: True
Explanation: Stock market crashes are viewed as social phenomena because external economic events interact with collective human behavior, such as herd mentality, creating feedback loops that amplify market movements.
A stock market crash and a bear market are essentially the same phenomenon, differing only in duration.
Answer: False
Explanation: While related, a crash is characterized by an abrupt, sharp decline and panic selling over a short period, whereas a bear market is a prolonged period of declining prices, typically lasting months or years.
There is a universally agreed-upon numerical threshold, such as a 20% drop, that precisely defines any stock market crash.
Answer: False
Explanation: While a 10% drop within several days is commonly associated with crashes, there is no single, universally agreed-upon numerical definition. The term often describes significant, rapid declines rather than a precise percentage.
Stock market crashes are usually well-anticipated by market participants due to predictable patterns.
Answer: False
Explanation: Stock market crashes are generally unexpected. They often occur when the market appears stable, surprising participants whose intuition fails to anticipate such abrupt downturns.
Paper wealth refers to the actual cash reserves held by investors during a market downturn.
Answer: False
Explanation: Paper wealth refers to the recorded, but unrealized, value of investments such as stocks. It represents potential value that can be lost during a market crash, distinct from actual cash reserves.
A stock market crash is characterized by a sudden, dramatic decline in stock prices across a significant portion of the market, leading to substantial paper wealth loss.
Answer: True
Explanation: This statement accurately defines a stock market crash as a rapid, widespread drop in stock prices resulting in significant loss of perceived investment value (paper wealth).
Which of the following best defines a stock market crash according to the provided text?
Answer: A sudden, sharp drop in stock prices across a major market, causing significant loss of perceived value.
Explanation: The provided text defines a stock market crash as a sudden and dramatic decline in stock prices across a significant portion of the market, leading to substantial loss of paper wealth.
Crashes typically occur under which market conditions?
Answer: Following extended bull markets with excessive optimism.
Explanation: Stock market crashes typically occur after extended periods of rising prices (bull markets) characterized by excessive optimism and speculative activity, rather than during bear markets or periods of low confidence.
How is a stock market crash described in terms of social dynamics?
Answer: A phenomenon combining economic events with crowd psychology creating a feedback loop.
Explanation: Crashes are described as social phenomena where economic events interact with crowd psychology, leading to feedback loops where selling by some investors triggers further selling by others.
What distinguishes a stock market crash from a bear market?
Answer: Crashes are abrupt and involve panic selling; bear markets are longer periods of decline.
Explanation: Crashes are defined by their abruptness and panic selling over a short period, whereas bear markets represent a more prolonged trend of declining stock prices, typically lasting months or years.
Is there a precise numerical definition for a stock market crash?
Answer: No, but it commonly refers to declines over 10% within several days.
Explanation: There is no single, universally agreed-upon numerical definition for a stock market crash. However, the term commonly refers to significant declines, often exceeding 10%, occurring over a short period like several days.
According to Niall Ferguson's observation mentioned in the text, how are stock market crashes typically perceived before they occur?
Answer: As generally unexpected, occurring when the market seems stable.
Explanation: Niall Ferguson noted that stock market crashes are typically unexpected, often occurring when the market appears stable, challenging the intuition that such events should be predictable or widely discussed beforehand.
What does 'paper wealth' represent in the context of a stock market crash?
Answer: The recorded, but unrealized, value of investments like stocks.
Explanation: Paper wealth refers to the recorded, but unrealized, value of investments such as stocks. A crash signifies that this potential value has significantly decreased, even if the assets have not been sold.
Panic selling is identified as a primary driver of stock market crashes.
Answer: True
Explanation: Panic selling, driven by fear and the desire to avoid further losses, is a significant factor that accelerates and exacerbates stock market crashes, often amplifying underlying economic pressures.
Increased investor imitation is identified as a potential precursor to market crashes.
Answer: True
Explanation: Research indicates that a significant increase in investor imitation, or herd behavior, often occurs in the year preceding a market crash, suggesting it can serve as an advance warning sign.
Economic bubbles, fueled by speculation, often precede stock market crashes by inflating asset prices unsustainably.
Answer: True
Explanation: Economic bubbles, characterized by speculative price inflation detached from intrinsic value, frequently precede stock market crashes. The bursting of these bubbles leads to rapid price declines and panic selling.
Research from the New England Complex Systems Institute identified increased investor imitation as a consistent predictor of market crashes.
Answer: True
Explanation: Studies from the New England Complex Systems Institute have indicated that a significant increase in investor imitation, or herd behavior, consistently occurs in the year preceding market crashes, suggesting it serves as a predictive indicator.
Speculation plays a minimal role in the formation of economic bubbles that can lead to crashes.
Answer: False
Explanation: Speculation plays a significant role in the formation of economic bubbles by detaching asset prices from intrinsic value, thereby increasing the likelihood of a subsequent crash when the bubble bursts.
A significant increase in investor imitation is considered a potential indicator of an impending market crash.
Answer: True
Explanation: Research indicates that a significant increase in imitation among investors, or herd behavior, often occurs in the year preceding a market crash, suggesting it can serve as an advance warning sign.
Excessive economic optimism and the bursting of speculative bubbles are key factors that often precede stock market crashes.
Answer: True
Explanation: Periods of excessive optimism often fuel speculative bubbles, where asset prices rise unsustainably. The inevitable bursting of these bubbles is a common precursor to stock market crashes.
What is identified as a primary driver of stock market crashes, alongside economic factors?
Answer: Panic selling by investors.
Explanation: Panic selling is identified as a primary driver of stock market crashes, often amplifying underlying economic factors and contributing to rapid, dramatic price declines.
What behavior did researchers find consistently increases in the year preceding a market crash?
Answer: Investor imitation (herd behavior).
Explanation: Research indicates that a significant increase in investor imitation, or herd behavior, consistently occurs in the year preceding market crashes, suggesting it serves as a predictive indicator and contributes to panic.
How do economic bubbles contribute to stock market crashes?
Answer: By detaching asset prices from intrinsic value through speculation, leading to a collapse when the bubble bursts.
Explanation: Economic bubbles inflate asset prices through speculation, detaching them from intrinsic value. When these bubbles burst, the subsequent sharp decline often triggers panic selling and contributes significantly to a stock market crash.
Tulip Mania in the 17th century Netherlands is recognized as an early example of an economic bubble.
Answer: True
Explanation: Tulip Mania, occurring in the Netherlands between 1634 and 1637, is widely cited as one of the earliest recorded instances of an economic bubble, characterized by speculative price inflation.
The Panic of 1907 was primarily caused by excessive government regulation leading to investor uncertainty.
Answer: False
Explanation: The Panic of 1907 was largely triggered by the manipulation of copper stocks by the Knickerbocker Trust Company, leading to a liquidity crisis and bank runs, rather than government regulation.
The establishment of the Federal Reserve in 1913 was a direct consequence of the Panic of 1907.
Answer: True
Explanation: The severe financial disruptions caused by the Panic of 1907 highlighted the need for a more stable central banking system, directly leading to the creation of the Federal Reserve in 1913.
The Roaring Twenties, preceding the 1929 crash, was characterized by widespread economic downturn and low investor confidence.
Answer: False
Explanation: The Roaring Twenties was characterized by significant economic expansion and high investor confidence, which ultimately contributed to the speculative bubble that preceded the 1929 crash.
Margin debt, allowing investors to borrow money to buy stocks, played a significant role in amplifying losses during the 1929 crash.
Answer: True
Explanation: The widespread use of margin debt during the 1920s allowed investors to leverage their positions. During the 1929 crash, margin calls forced widespread selling, significantly amplifying losses and accelerating the market's decline.
The 1929 Wall Street Crash saw the Dow Jones Industrial Average (DJIA) drop by over 10% on Black Thursday alone.
Answer: True
Explanation: On Black Thursday, October 24, 1929, the DJIA experienced a significant decline of 12.8%, exceeding 10%, contributing to the panic that unfolded over the subsequent days.
The 1929 crash resulted in a relatively minor economic downturn, with the DJIA recovering quickly.
Answer: False
Explanation: The 1929 crash led to the Great Depression, the most severe economic crisis of modern times, with the DJIA eventually declining by 89% from its peak.
Black Monday in 1987 saw the DJIA decline by approximately 11.3% in a single day.
Answer: False
Explanation: Black Monday, October 19, 1987, saw the DJIA decline by approximately 22.6% (508 points), not 11.3%.
Program trading and herd behavior were cited as potential contributors to the 1987 stock market crash.
Answer: True
Explanation: Factors such as program trading, portfolio insurance strategies, and herd behavior were identified as significant contributors to the rapid and severe decline observed during the 1987 stock market crash.
The bankruptcy of Lehman Brothers in 2008 was a minor event that did not significantly escalate the financial crisis.
Answer: False
Explanation: The bankruptcy of Lehman Brothers in September 2008, along with the collapse of Merrill Lynch and liquidity issues at AIG, was a pivotal event that significantly escalated the global financial crisis.
The 2008 financial crisis led to a worldwide reduction in stock values and warnings of potential systemic meltdown.
Answer: True
Explanation: The 2008 financial crisis resulted in substantial global stock value reductions and prompted warnings, such as that from the IMF head, about the potential for a systemic meltdown of the world financial system.
The 2010 Flash Crash was primarily caused by a sudden increase in investor confidence and buying.
Answer: False
Explanation: The 2010 Flash Crash was primarily attributed to a large, automated sale of S&P 500 E-Mini contracts by a mutual fund company, not an increase in investor confidence or buying.
The downgrade of the United States' credit rating by Standard & Poor's in August 2011 triggered a significant market downturn.
Answer: True
Explanation: The downgrade of the U.S. credit rating by S&P in August 2011 led to a substantial market downturn, with the S&P 500 experiencing a significant drop and trillions in market value being erased.
During the COVID-19 pandemic's initial spread in February 2020, global stock markets experienced only minor fluctuations.
Answer: False
Explanation: During the initial spread of the COVID-19 pandemic in February 2020, global stock markets experienced significant declines, with major indices like the FTSE 100, DJIA, and S&P 500 dropping substantially.
The hypothetical 2025 stock market crash was attributed to global trade agreements fostering economic stability.
Answer: False
Explanation: The hypothetical 2025 crash was attributed to worldwide tariffs imposed by the US President, not to trade agreements fostering stability.
During Black Thursday in 1929, the ticker tape system functioned normally, providing real-time price information.
Answer: False
Explanation: On Black Thursday (October 24, 1929), the ticker tape system was overwhelmed by the sheer volume of trading orders, causing significant delays in reporting stock prices and exacerbating market uncertainty.
The 1987 crash was primarily a localized event affecting only the US stock market.
Answer: False
Explanation: The stock market crash of October 1987 was a global event, affecting most major world markets. Many countries experienced declines exceeding 20% on Black Monday.
No countries closed their stock markets in response to the severity of the 2008 financial crisis.
Answer: False
Explanation: Due to the severity of the 2008 financial crisis, some countries did temporarily close their stock markets. For instance, the Indonesian stock market halted trading after a 10% drop in a single day.
The DJIA's point drop on March 16, 2020, was the largest single-day point decline in its history.
Answer: False
Explanation: The DJIA's 2,997-point drop on March 16, 2020, was the largest point drop *since* Black Monday in 1987, but the statement claims it was the largest in its *entire* history, which is not explicitly confirmed and potentially false based on the phrasing.
During the 1987 crash, NASDAQ trading for Microsoft shares was completely halted for the entire day.
Answer: False
Explanation: While trading for Microsoft shares on NASDAQ was severely curtailed and experienced significant disruptions during the 1987 crash, it was not halted for the entire day; trading occurred for a limited period.
The head of the IMF warned of a potential 'systemic meltdown' in October 2008.
Answer: True
Explanation: On October 11, 2008, the head of the International Monetary Fund (IMF) issued a stark warning that the world financial system was on the 'brink of systemic meltdown,' highlighting the extreme severity of the crisis.
The DJIA's 2,997-point drop on March 16, 2020, was significant because it surpassed the percentage decline seen on Black Monday 1987.
Answer: False
Explanation: The DJIA's 2,997-point drop on March 16, 2020, was significant as the largest point drop since Black Monday (1987), but its percentage decline (12.93%) was less than the 22.6% decline experienced on Black Monday 1987.
The hypothetical 2025 crash was linked to specific US tariff policies implemented by Donald Trump.
Answer: True
Explanation: The hypothetical 2025 stock market crash described in the text was attributed to worldwide tariffs imposed by then-US President Donald Trump, specifically a 10% tariff on all imported goods and reciprocal tariffs.
The DJIA experienced its largest percentage decline since Black Monday on March 12, 2020.
Answer: True
Explanation: On March 12, 2020, the DJIA declined by 9.99%, which was its largest percentage drop since Black Monday in 1987, reflecting the severe market reaction to the escalating COVID-19 pandemic.
The 1987 crash saw the Dow Jones Industrial Average fully recover its losses within approximately one year.
Answer: False
Explanation: Despite fears of a prolonged downturn, the market rallied significantly after the 1987 crash. The Dow Jones Industrial Average fully recovered its losses within two years, by September 1989, not within approximately one year.
What historical event is cited as the first recorded economic bubble?
Answer: The Dutch Tulip Mania (1634-1637).
Explanation: Tulip Mania, occurring in the Netherlands between 1634 and 1637, is widely cited as one of the earliest recorded instances of an economic bubble, characterized by speculative price inflation.
The Panic of 1907 was significantly triggered by the actions of which entity?
Answer: The Knickerbocker Trust Company.
Explanation: The Panic of 1907 was largely triggered by the manipulation of copper stocks by the Knickerbocker Trust Company, leading to a liquidity crisis and bank runs.
What was a major long-term consequence of the Panic of 1907?
Answer: The establishment of the Federal Reserve.
Explanation: The severe financial disruptions caused by the Panic of 1907 highlighted the need for a more stable central banking system, directly leading to the creation of the Federal Reserve in 1913.
Which factor heavily contributed to the amplified losses during the 1929 Wall Street Crash?
Answer: Widespread use of margin debt by investors.
Explanation: The widespread use of margin debt during the 1920s allowed investors to leverage their positions. During the 1929 crash, margin calls forced widespread selling, significantly amplifying losses and accelerating the market's decline.
What happened on Black Tuesday (October 29, 1929)?
Answer: The DJIA dropped 11.3% due to forced liquidations, overwhelming the ticker tape.
Explanation: On Black Tuesday, October 29, 1929, the DJIA dropped a further 11.3% due to forced liquidations from margin calls, overwhelming the ticker tape system and intensifying panic.
What was the ultimate economic impact of the 1929 stock market crash on the US?
Answer: The onset of the Great Depression, the most severe economic crisis of modern times.
Explanation: The 1929 crash precipitated the Great Depression, which became the most severe and prolonged economic crisis in modern U.S. history, characterized by widespread unemployment and economic hardship.
How much did the DJIA lose in value on Black Monday, October 19, 1987?
Answer: Approximately 22.6%
Explanation: On Black Monday, October 19, 1987, the DJIA plummeted by 508 points, representing a 22.6% loss in value in a single day, marking the largest single-day percentage loss in Wall Street history at that time.
Which of the following was cited as a contributing factor to the 1987 stock market crash?
Answer: Portfolio insurance strategies.
Explanation: Factors such as portfolio insurance strategies, program trading, herd behavior, and concerns about the U.S. trade deficit were identified as contributing factors to the 1987 crash.
Which event significantly escalated the financial crisis in September 2008?
Answer: The bankruptcy of Lehman Brothers and collapse of Merrill Lynch.
Explanation: The bankruptcy of Lehman Brothers and the collapse of Merrill Lynch on September 15, 2008, marked a critical escalation of the 2008 financial crisis, triggering widespread panic and liquidity issues.
What role did subprime loans and credit default swaps play in the 2008 crisis?
Answer: They were central to the crisis due to widespread exposure and insurance.
Explanation: Packaged subprime loans and the credit default swaps used to insure them were central to the 2008 crisis, creating widespread exposure and systemic risk when the underlying assets began to default.
How was the 2010 Flash Crash primarily attributed?
Answer: A massive sale of S&P 500 E-Mini contracts by a mutual fund.
Explanation: The 2010 Flash Crash was primarily attributed to a large, automated sale of S&P 500 E-Mini contracts by a mutual fund company, which triggered rapid, cascading sell-offs.
What event directly triggered the market downturn in August 2011?
Answer: A downgrade of the United States' credit rating by S&P.
Explanation: The market downturn in August 2011 was triggered by Standard & Poor's downgrade of the United States' credit rating, which led to a significant drop in the S&P 500 and substantial market value loss.
During the early stages of the COVID-19 pandemic (February 2020), which major stock index saw a 13% decline in one week?
Answer: The FTSE 100.
Explanation: During the week of February 24-28, 2020, the FTSE 100 index experienced a significant decline of 13% due to the escalating concerns surrounding the COVID-19 pandemic.
What was the stated cause of the hypothetical 2025 stock market crash in the text?
Answer: Worldwide tariffs imposed by the US President.
Explanation: The hypothetical 2025 stock market crash described in the text was attributed to worldwide tariffs imposed by then-US President Donald Trump, specifically a 10% tariff on all imported goods and reciprocal tariffs.
What issue plagued the ticker tape system during Black Thursday (1929)?
Answer: It malfunctioned due to excessive selling orders causing delays.
Explanation: On Black Thursday (October 24, 1929), the ticker tape system was overwhelmed by the sheer volume of trading orders, causing significant delays in reporting stock prices and exacerbating market uncertainty.
Which of the following was a key event that escalated the 2008 financial crisis?
Answer: The bankruptcy of Lehman Brothers.
Explanation: The bankruptcy of Lehman Brothers in September 2008 marked a critical escalation of the 2008 financial crisis, triggering widespread panic and liquidity issues throughout the global financial system.
What warning did the head of the IMF issue in October 2008?
Answer: That the financial system was on the brink of systemic meltdown.
Explanation: On October 11, 2008, the head of the International Monetary Fund (IMF) issued a stark warning that the world financial system was on the 'brink of systemic meltdown,' highlighting the extreme severity of the crisis.
The market downturn in August 2011 was triggered by what specific event?
Answer: A downgrade of the US credit rating.
Explanation: The market downturn in August 2011 was triggered by Standard & Poor's downgrade of the United States' credit rating, which led to a significant drop in the S&P 500 and substantial market value loss.
Which of the following is NOT listed as a contributing factor to the 1987 crash?
Answer: Low P/E ratios.
Explanation: Contributing factors cited for the 1987 crash include herd behavior, program trading, and a falling US dollar. Low P/E ratios are not mentioned as a direct cause in the provided text.
What happened to the DJIA by July 1932, following the 1929 crash?
Answer: It had declined by 89% from its peak.
Explanation: By July 1932, the Dow Jones Industrial Average had lost 89% of its value from its peak in September 1929, illustrating the devastating and prolonged impact of the 1929 crash and subsequent Great Depression.
Benoit Mandelbrot's research suggested that large stock price movements occur less frequently than predicted by the random walk theory.
Answer: False
Explanation: Mandelbrot's research suggested that large stock price movements occur *more* frequently than predicted by the random walk theory, indicating that such extreme events are not as rare as the model suggests.
Self-organized criticality is a concept suggesting that stock market crashes might be inherent properties of complex financial systems.
Answer: True
Explanation: The concept of self-organized criticality posits that complex systems, like financial markets, can naturally evolve into critical states where small perturbations can lead to large-scale events, such as crashes, suggesting they are inherent properties.
A Lévy flight describes a random walk characterized only by small, incremental price changes.
Answer: False
Explanation: A Lévy flight is a type of random walk that is characterized by occasional large jumps or movements, distinguishing it from a random walk that consists solely of small, incremental changes.
Chaos theory is suggested as a potentially more suitable framework than random walk theory for explaining market crashes.
Answer: True
Explanation: Non-linear analysis and concepts from chaos theory are proposed as potentially better frameworks than the traditional random walk model for explaining the complex dynamics and frequent extreme movements observed in financial markets, including crashes.
The 'inverse cubic power law' suggests that stock market crashes are completely unpredictable random occurrences.
Answer: False
Explanation: The 'inverse cubic power law' suggests that stock market crashes are not completely unpredictable random occurrences but rather follow a predictable pattern related to the complex dynamics of financial markets, implying a degree of inherent structure.
Benoit Mandelbrot challenged the random walk theory by proposing that stock price movements might exhibit characteristics of:
Answer: Lévy flights with occasional large jumps.
Explanation: Benoit Mandelbrot proposed that stock price variations might follow Lévy flights, a type of random walk characterized by occasional large jumps, rather than strictly adhering to the small, incremental changes predicted by the standard random walk theory.
Research on self-organized criticality suggests that stock market crashes:
Answer: May be inherent properties of complex financial systems.
Explanation: The concept of self-organized criticality suggests that stock market crashes may be inherent properties of complex financial systems, arising naturally from the system's dynamics when it reaches a critical state.
What mathematical concept, related to chaos theory, is suggested by research to explain the frequency of stock market crashes?
Answer: The inverse cubic power law.
Explanation: Research suggests that the frequency of stock market crashes may follow an inverse cubic power law, a concept related to chaos theory, indicating that crashes are not entirely random but follow predictable patterns within complex financial systems.
What did Benoit Mandelbrot argue about stock price movements compared to the random walk theory?
Answer: Large price movements occurred more frequently than predicted.
Explanation: Benoit Mandelbrot argued that large stock price movements, such as those seen in crashes, occur much more frequently than predicted by the standard random walk theory, suggesting that extreme events are more common than the model allows.
Circuit breakers, or trading curbs, were introduced after the 1987 crash to halt trading during extreme volatility.
Answer: True
Explanation: Following the 1987 stock market crash, regulatory bodies implemented circuit breakers (trading curbs) as a mechanism to temporarily halt trading during periods of sharp market declines, aiming to mitigate panic and provide a pause for reassessment.
Following the 2010 Flash Crash, the SEC increased the threshold for triggering a circuit breaker to 10%.
Answer: False
Explanation: In response to the 2010 Flash Crash, the SEC *lowered* the threshold for triggering a circuit breaker from 10% to 7% for Level 1 halts, aiming for quicker intervention.
The primary purpose of trading curbs is to encourage more aggressive trading during volatile periods.
Answer: False
Explanation: The primary purpose of trading curbs (circuit breakers) is to halt trading temporarily during periods of extreme volatility, providing a cooling-off period to curb panic selling, not to encourage aggressive trading.
In the US market, a 7% drop in the S&P 500 triggers a Level 1 circuit breaker, halting trading.
Answer: True
Explanation: A 7% decline in the S&P 500 Index before 3:25 PM triggers a Level 1 circuit breaker, resulting in a temporary trading halt of at least 15 minutes.
France suspends trading for its main stock index (CAC 40) if even a small number of constituent stocks experience price limits.
Answer: False
Explanation: In France, the CAC 40 index calculation is suspended only if trading halts affect stocks representing over 35% of the index's capitalization; smaller percentages trigger different responses or no suspension of the index itself.
A Level 1 circuit breaker halt (7% drop) in the US market is permanent for the trading day.
Answer: False
Explanation: A Level 1 circuit breaker halt, triggered by a 7% drop in the S&P 500 before 3:25 PM, results in a temporary trading halt of at least 15 minutes, not a permanent closure for the day.
If less than 25% of the CAC 40 Index's capitalization is affected by trading halts, the index calculation is immediately suspended.
Answer: False
Explanation: The CAC 40 index calculation is suspended only if trading halts affect stocks representing over 35% of the index's capitalization. If less than 25% is affected, derivative market trading might be suspended, but not the index calculation itself.
The Level 2 circuit breaker threshold (13% drop) in the US market results in a permanent halt of trading for the day.
Answer: False
Explanation: A Level 2 circuit breaker halt (13% drop in the S&P 500) triggers a trading pause of two hours if breached before 1 PM, or a one-hour pause if breached between 1 PM and 2 PM. It does not result in a permanent halt unless the Level 3 threshold is met.
What mitigation strategy was implemented in stock markets following the 1987 crash?
Answer: Introduction of circuit breakers (trading curbs).
Explanation: Following the 1987 stock market crash, regulatory bodies implemented circuit breakers (trading curbs) as a mechanism to temporarily halt trading during periods of sharp market declines, aiming to mitigate panic.
What regulatory change occurred immediately after the 2010 Flash Crash?
Answer: The circuit breaker threshold was lowered from 10% to 7%.
Explanation: In response to the 2010 Flash Crash, the SEC *lowered* the threshold for triggering a circuit breaker from 10% to 7% for Level 1 halts, aiming for quicker intervention.
What is the purpose of the Level 3 circuit breaker threshold (20% S&P 500 drop)?
Answer: A complete market closure for the day.
Explanation: The Level 3 threshold, set at a 20% decline in the S&P 500 Index, triggers a complete closure of the market for the remainder of the trading day, regardless of the time the threshold is breached.
In France, what condition could lead to the suspension of the CAC 40 Index calculation itself?
Answer: Trading halts affecting stocks representing over 35% of the index's capitalization.
Explanation: The CAC 40 index calculation is suspended if trading halts affect stocks representing over 35% of the index's capitalization. Lesser impacts may trigger other responses but not the suspension of the index calculation itself.
What is the purpose of circuit breakers in stock markets?
Answer: To halt trading temporarily during sharp declines to curb panic.
Explanation: Circuit breakers are designed to temporarily halt trading during periods of sharp market declines. This pause aims to provide a cooling-off period, allowing market participants to reassess and potentially curb panic selling.