Abstract

http://ssrn.com/abstract=2379029
 


 



Single Stock Circuit Breakers on the London Stock Exchange: Do They Improve Subsequent Market Quality?


James Brugler


University of Cambridge

Oliver B. Linton


University of Cambridge

March 12, 2014


Abstract:     
This paper uses proprietary data to evaluate the efficacy of single-stock circuit breakers on the London Stock Exchange during July and August 2011. We exploit exogenous variation in the length of the uncrossing periods that follow a trading suspension to estimate the effect of auction length on the volume of trades, frequency of trading and the magnitude of market microstructure noise in the returns process. We also estimate the effect of a trading suspension in one FTSE-100 stock on the volume of trades, trading frequency and the magnitude of market microstructure noise for other FTSE-100 stocks. We find that auction length has a significant detrimental effect on market quality for the suspended security when returns are negative but no discernible effect when returns are positive. We also find that trading suspensions help to ameliorate the spread of market microstructure noise and price inefficiency across securities during falling markets but the reverse is true during rising markets. Although trading suspensions may not improve the trading process within a particular security, they do appear to play an important role preventing the spread of poor market quality across securities in falling markets and therefore can be effective tools for promoting market-wide stability.

Number of Pages in PDF File: 48

Keywords: Circuit breakers, market microstructure, market quality

JEL Classification: G12, G14, G15, G18

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Date posted: January 15, 2014 ; Last revised: April 9, 2014

Suggested Citation

Brugler, James and Linton, Oliver B., Single Stock Circuit Breakers on the London Stock Exchange: Do They Improve Subsequent Market Quality? (March 12, 2014). Available at SSRN: http://ssrn.com/abstract=2379029 or http://dx.doi.org/10.2139/ssrn.2379029

Contact Information

James Brugler (Contact Author)
University of Cambridge ( email )
Faculty of Economics
Cambridge, CB3 9DD
United Kingdom
Oliver B. Linton
University of Cambridge ( email )
Faculty of Economics
Cambridge, CB3 9DD
United Kingdom
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