Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets
38 Pages Posted: 27 Jan 2017 Last revised: 6 Feb 2018
Date Written: January 27, 2017
We study circuit breakers in a fragmented, multi-market environment and investigate whether a coordination of circuit breakers is necessary to ensure their effectiveness. In doing so, we analyze 2,337 volatility interruptions on Deutsche Boerse and research whether a volume migration and an accompanying volatility spillover to alternative venues that continue trading can be observed. Different to prevailing theoretical rationale, trading volume on alternative venues significantly decreases during circuit breakers on the main market and we do not find any evidence for volatility spillover. Moreover, we show that the market share of the main market increases sharply during a circuit breaker. Surprisingly, this is amplified with increasing levels of fragmentation. We identify high-frequency trading as a major reason for the vanishing trading activity on the alternative venues and give empirical evidence that a coordination of circuit breakers is not essential for their effectiveness as long as market participants shift to the dominant venue during market stress.
Keywords: Circuit Breaker, Volatility Interruption, Market Fragmentation, High-Frequency Trading, Stock Market, Regulation, Liquidity
JEL Classification: G14, G15, G18, G28
Suggested Citation: Suggested Citation