The Spillover Effect of Single Stock Circuit Breakers on the London Stock Exchange

James A Brugler

University of Melbourne - Department of Finance

Oliver B. Linton

University of Cambridge

November 27, 2015

This paper uses exchange-provided transaction data covering nearly 800 stocks trading on the London Stock Exchange (LSE) to assess the effect of single-stock trading suspensions (circuit breakers) on other stocks that remain in continuous trading (the “spillover effect”). We exploit the discontinuous nature of circuit breakers on the LSE, whereby trading is suspended if a potential transaction price exceeds pre-determined price limits, to define a counter-factual for the spillover effect of circuit breakers that is based on stocks trading close to the limit price but not exceeding it over a given interval. We find that the market-wide effect of circuit breakers differs across market conditions. For suspensions at upper price limits, in members of the FTSE-100 index or those associated with a correction against the recent price trend of the suspended security, circuit breakers lead to significant increases in volatility and trading activity in other stocks, and push returns of other stocks in the direction of the limit price that was exceeded. For suspensions at the lower price limit, for stocks outside the FTSE-100 index, or for circuit breakers associated with a continuation of recent trends, circuit breakers appear to have a more beneficial effect on other stocks.

Number of Pages in PDF File: 39

Keywords: Circuit breakers, market microstructure, market quality

JEL Classification: G12, G14, G15, G18

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Date posted: January 15, 2014 ; Last revised: December 8, 2015

Suggested Citation

Brugler, James A and Linton, Oliver B., The Spillover Effect of Single Stock Circuit Breakers on the London Stock Exchange (November 27, 2015). Available at SSRN: http://ssrn.com/abstract=2379029 or http://dx.doi.org/10.2139/ssrn.2379029

Contact Information

James A Brugler (Contact Author)
University of Melbourne - Department of Finance ( email )
Faculty of Business and Economics
Parkville, Victoria 3010 3010
Oliver B. Linton
University of Cambridge ( email )
Faculty of Economics
Cambridge, CB3 9DD
United Kingdom
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