Faculty of Economics and Business Administration Publications Database

The Effect of Single-Stock Circuit Breakers on the Quality of Fragmented Markets

Lutat, Marco
Abstract: Since the May 6th, 2010 flash crash in the U.S., appropriate measures ensuring safe, fair and reliable markets become more relevant from the perspective of investors and regulators. Circuit breakers in various forms are already implemented for individual markets to ensure price continuity and prevent potential market failure and crash scenarios. However, coordinated inter-market safeguards have hardly been adopted, but are considered essential in a fragmented environment to prevent situations, where main markets halt trading but stock prices continue to decline as traders migrate to satellite markets. The objective of this paper is to empirically study the impact of circuit breakers in a single-market and inter-market setup. We find a decline in market volatility after the trading halt in the home and satellite market which come at the cost of higher spreads. Moreover, the satellite market’s quality and price discovery during CBs is weakened and only recovers as the other market restarts trading.
Keywords: Circuit Breaker; Electronic Trading; Exchanges; Market Coordination; Market Fragmentation
Year: 2013
Link External Source: Online Version
Book Title: Enterprise Applications and Services in the Finance Industry
ISBN: 978-3642362187
Adress: Berlin Heidelberg 2013
Editor: Rabhi, F. A. / Gomber, Peter
Publisher: Springer
Pages: 71 - 87