Circuit Breakers and Market Runs

50 Pages Posted: 12 Jun 2012 Last revised: 21 Sep 2016

See all articles by Sarah Draus

Sarah Draus

Erasmus University Rotterdam (EUR)

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance

Date Written: August 22, 2016


Merely out of fear for future liquidity shocks, traders may run on financial markets. We show this coordination failure could be overcome by applying circuit breakers (which curb excessive trading). However, the common-practice circuit breakers fall short of their potential and could even damage welfare. Our analysis suggests a novel forward-looking circuit breaker which (i) becomes most restrictive precisely when the expected social loss related to inefficient upfront trading is largest, and (ii) is only implemented when it yields a welfare contribution. Bridging to practice, the calibration of this welfare-optimal circuit breaker among others reflects (the fear of future) funding liquidity constraints.

Keywords: liquidity crisis, market stability, trading halt, high frequency trading, flash crash

JEL Classification: D53, G01, G10, G18

Suggested Citation

Draus, Sarah and Van Achter, Mark, Circuit Breakers and Market Runs (August 22, 2016). Available at SSRN: or

Sarah Draus (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA

Mark Van Achter

Erasmus University Rotterdam (EUR) - Finance ( email )

Burgemeester Oudlaan 50
P.O. Box 1738
3000 DR Rotterdam
+31 10 40 82 953 (Phone)
+31 10 40 89 017 (Fax)


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