Update, January 7th, 3.50pm London: China's stock exchanges announced on Thursday evening that they would suspend use of the circuit-breakers. The securities regulator said they were not the main cause of the market's fall but had not achieved their aim and had instead caused a 'magnet effect', as described in the article below. BIG swings in the Chinese stockmarket are par for the course. But even by its wild standards, the alacrity of its latest crash was stunning. Just 13 minutes into trading on Thursday, the CSI 300 index of blue-chip stocks fell 5%, triggering the first circuit-breaker: a 15-minute pause for traders to supposedly regain their cool. When the action resumed, it lasted all of one minute before the second and final circuit-breaker was hit: the CSI 300 fell 7%, which necessitated a closure of the market for the rest of day. Trading, in other words, lasted all of 14 minutes before being halted. The obvious conclusion to draw from the market sell-off is that China’s economy is in big trouble. Why else would investors be in such a rush to dump their shares? Growth is certainly slowing, but the problem with this view is that the Chinese stockmarket has only ever had a tenuous relationship with reality. It is often derided as a casino. Wu Jinglian, a veteran economist, has quipped that this is unfair to casinos. They have strict rules and gamblers cannot see each other’s cards. In China's stockmarket, the rules rarely apply to big investors, who treat price manipulation as a basic trading strategy.

But while the swings of the Chinese market defy explanations most of the time, there is actually extensive research to help explain the dynamics of the latest crash. For the culprit, look no further than the circuit-breakers that regulators introduced at the start of this week. Only four days into operation, they have already been triggered in much the same manner twice: with the 5% threshold hit first and then full closure at the 7% level soon after. The theory of circuit-breakers is that they are supposed to help calm an over-excited market. In China’s case, it appears that they have done just the opposite: encouraging traders to lock in sell orders to make sure they are the first to escape the market before the bottom falls out.

For analysts who have studied circuit-breakers, this should not be surprising. They generally fall into two camps: those who think they help to reduce volatility and those who worry they exacerbate it by leading to an acceleration of trading before halts occur. But even the former acknowledge that circuit-breakers pose the risks described by the latter. The general view is thus that that they should only be applied in extreme cases.

As Arthur Levitt, then chairman of America's Securities and Exchange Commission (SEC), explained in 1998:

Circuit-breakers were meant, from their inception, to be triggered only in truly extraordinary circumstances—ie, a severe market decline when the prices have dropped so dramatically that liquidity and credit dry up, and when prices threaten to cascade in a panic-driven spiral. As long as the markets are closed or have the potential to close early, there is uncertainty. Uncertainty for individual investors leads to confusion.

In China, big swings between the open and close of the stockmarket used to be the norm, much to the chagrin of reporters who were expected to divine something intelligible from the movements. Peter Thal Larsen of Reuters Breakingviews put it best in a tweet: “Iron rule of Chinese stockmarkets: any observation based on intraday movements will be obsolete by the close of trading.”

The introduction of circuit-breakers has changed this logic. They have highlighted a problem known as the “magnet effect”. The Hong Kong Securities and Futures Commission defined this in a 2001 article as the possibility that circuit-breakers might “accelerate price movements towards the preannounced limits as market participants alter their strategies and trade in anticipation of a market halt”.

Based on the four days in which China’s breakers have been in operation, the first magnetic pull seems to kick in at around 4% down. Traders rush to sell before they are locked out. After trading starts again at 5% down, the magnetic draw to 7% is almost irresistible; no one wants to be left holding the hot potato.

In its design of the circuit-breakers, China has violated one of the basic principles of those countries that also apply them: the gaps between breaker levels should be sufficiently wide to avoid having an overwhelming magnet effect. The SEC halts trading at the 7%, 13% and 20% thresholds for the S&P 500 index. And bear in mind that American markets are far more mature, making even 7% changes a rarity. In China, the 5% threshold is something that was crossed with regularity before the circuit-breakers were introduced, with the market often giving up its gains or paring its losses over the course of the frenetic trading day. Now, though, the circuit-breaker makes those lurches permanent, until the next trading day begins.

None of this means that the Chinese stockmarket should be performing well. Share prices, especially for small-cap stocks, are still extremely frothy. But the madness of 14-minute-long trading days was utterly avoidable. The latest update is that the securities regulator has called an unscheduled meeting to discuss the circuit-breakers, according to Bloomberg. If only they had bothered to discuss them properly before implementation.