Circuit Breakers in Fragmented Markets – An Assessment

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 been partly adopted only, but are essential in a fragmented environment to prevent situations, where main markets stop trading but stock prices decline as trading continues in satellite markets. The objective of this paper is to provide insight into recent circuit breaker implementations, their individual specifications and potential coordination between venues. We analyze trades during primary market halts and find no migration of trading activity to alternative venues. Moreover, our data provides no evidence of changes to the market participant structure in the alternative venue.

Keywords: Circuit Breaker, Electronic Trading, Exchanges, Market Coordination, Market Fragmentation

JEL Classification: G10, G15, G18