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.
Access this chapter
Tax calculation will be finalised at checkout
Purchases are for personal use only
Preview
Unable to display preview. Download preview PDF.
References
Harris, L.: Circuit Breakers and Trading Limits - What we have learned. Brookings. Wharton Papers on Financial Services, pp. 17–63 (1998)
Kim, Y.H., Yang, J.J.: What Makes Circuit Breakers Attractive to Financial Markets? A Survey. Financial Markets, Institutions & Instruments 13(3), 109–146 (2004)
Engelen, K.: Empirical Evidence on the Role of Trading Suspensions in Disseminating New Information to the Capital Market. Journal of Business Finance & Accounting 33(8), 1142–1167 (2006)
SEC: Investor Bulletin: Trading Suspensions, http://www.sec.gov/investor/alerts/tradingsuspensions.pdf
Kim, K.A., Rhee, S.G.: Price Limit Performance: Evidence from the Tokyo Stock Exchange. The Journal of Finance 52(2), 885–901 (1997)
Greenwald, B., Stein, J.C.: Transactional Risk, Market Crashes, and the Role of Circuit Breakers. The Journal of Business 64(4), 443–462 (1991)
Kodres, L.E., O’Brien, D.P.: The Existence of Pareto-Superior Price Limits. The American Economic Review 84(4), 919–932 (1994)
Coursey, D.L., Dyl, E.A.: Price limits, trading suspensions, and the adjustment of prices to new information. Review of Futures Markets 9(2), 342–360 (1990)
Ackert, L., Church, B., Jayaraman, N.: An experimental study of circuit breakers: The effect of mandated market closures and temporary halts on market behavior. Journal of Financial Markets 4(2), 185–208 (2001)
Chen, Y.-M.: Price limits and stock market volatility in Taiwan. Pacific-Basin Finance Journal 1(2), 139–153 (1993)
Bildik, R., Gülay, G.: Are price limits effective? Evidence from the Istanbul Stock Exchange. Journal of Financial Research 29(3), 383–403 (2006)
Hassan, M.K., Islam, A.M., Basher, S.A.: Market Efficiency, Time-Varying Volatility and Equity Returns in Bangladesh Stock Market. Working Paper (2000)
Lee, S.-B., Kim, K.-J.: The effect of price limits on stock price volatility: Empirical evidence in Korea. Journal of Business Finance & Accounting 22(2), 257–267 (2006)
Subrahmanyam, A.: Circuit breakers and market volatility: A theoretical perspective. Journal of Finance 49(1), 237–254 (1994)
Morris, C.S.: Coordinating Circuit Breakers in Stock and Futures markets. FRB Kansas City - Economic Review 75(2), 35–48 (1990)
Fabozzi, F.J., Ma, C.K.: The over-the-counter market and New York Stock Exchange trading. The Financial Review 23(4), 427–437 (1988)
Chakrabarty, B., Corwin, S.A., Panayides, M.A.: When a halt is not a halt: An analysis of off-NYSE trading during NYSE market closures. Journal of Financial Intermedation 20(3), 361–386 (2011)
Gomber, P., Lutat, M., Haferkorn, M., Zimmermann, K.: Circuit Breakers in Fragmented Markets – An Assessment. In: International Conference on Business and Finance, Hyderabad (2012)
Chi-X: Europe Guidance Note 1; ERRONEOUS TRADES, http://www.chi-xeurope.com/chi-x-pdf-downloads/guidance-notes-1.-8-final-clean.pdf
Kim, Y.H., Yang, J.J.: The effect of price limits on intraday volatility and information asymmetry. Pacific-Basin Finance Journal 16(5), 522–538 (2008)
Harris, L.: A transaction data study of weekly and intradaily patterns in stock returns. Journal of Financial Economics 16(1), 99–117 (1986)
Wilcoxon, F.: Individual Comparisons by Ranking Methods. Biometrics Bulletin 6(1), 80–83 (1945)
French, K.R., Roll, R.: Stock Return Variances: The Arrival of Information and the Reaction of Traders. Journal of Financial Economics 17(1), 5–26 (1986)
Karpoff, J.M.: The Relation between Price Changes and Trading Volume: A Survey. Journal of Financial and Quantitative Analysis 22(1), 109–126 (1987)
Schwert, W.: Why Does Stock Market Volatility Change Over Time? The Journal of Finance 44(5), 115–153 (1989)
Stoll, H.R., Whaley, R.E.: The Dynamics of Stock Index and Stock Index Futures Returns. Journal of Financial and Quantitative Analysis 25(4), 441–468 (1990)
Bland, J.M., Altman, D.G.: Multiple significance tests: the Bonferroni method. BMJ 310, 170–171 (1995)
Goldstein, M., Kavajecz, K.: Trading strategies during circuit breakers and extreme market movement. Journal of Financial Markets 7(3), 301–333 (2004)
Author information
Authors and Affiliations
Editor information
Editors and Affiliations
Rights and permissions
Copyright information
© 2013 Springer-Verlag Berlin Heidelberg
About this paper
Cite this paper
Gomber, P., Haferkorn, M., Lutat, M., Zimmermann, K. (2013). The Effect of Single-Stock Circuit Breakers on the Quality of Fragmented Markets. In: Rabhi, F.A., Gomber, P. (eds) Enterprise Applications and Services in the Finance Industry. FinanceCom 2012. Lecture Notes in Business Information Processing, vol 135. Springer, Berlin, Heidelberg. https://doi.org/10.1007/978-3-642-36219-4_5
Download citation
DOI: https://doi.org/10.1007/978-3-642-36219-4_5
Publisher Name: Springer, Berlin, Heidelberg
Print ISBN: 978-3-642-36218-7
Online ISBN: 978-3-642-36219-4
eBook Packages: Computer ScienceComputer Science (R0)