The Effect of Single-Stock Circuit Breakers on the Quality of Fragmented Markets

Lecture Notes in Business Information Processing, 136, pp. 71-87

Posted: 23 Feb 2013

See all articles by Peter Gomber

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration

Martin Haferkorn

Goethe University Frankfurt Faculty of Economics and Business Administration

Marco Lutat

Goethe University Frankfurt Faculty of Economics and Business Administration

Kai Zimmermann

Goethe University Frankfurt Faculty of Economics and Business Administration

Date Written: February 21, 2013

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.

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

JEL Classification: G10, G15, G18

Suggested Citation

Gomber, Peter and Haferkorn, Martin and Lutat, Marco and Zimmermann, Kai, The Effect of Single-Stock Circuit Breakers on the Quality of Fragmented Markets (February 21, 2013). Lecture Notes in Business Information Processing, 136, pp. 71-87. Available at SSRN: https://ssrn.com/abstract=2221903

Peter Gomber

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.efinancelab.de/no_cache/team/?user_wiwipubs_pi2[showUid]=478

Martin Haferkorn (Contact Author)

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 4
Frankfurt am Main, 60323
Germany

Marco Lutat

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.efinancelab.de/no_cache/team/?user_wiwipubs_pi2[showUid]=548

Kai Zimmermann

Goethe University Frankfurt Faculty of Economics and Business Administration ( email )

Grueneburgplatz 1
Frankfurt am Main, 60323
Germany

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