How Effective are Trading Pauses?
49 Pages Posted: 9 Jul 2016
Date Written: April 2017
Exploiting NASDAQ order book data and difference-in-differences methodology, we identify the distinct effects of trading pause mechanisms introduced on U.S. stock exchanges after May 2010. We show that the mere existence of such a regulation constitutes a safeguard which makes market participants behave differently in anticipation of a pause. Pauses tend to break local price trends, make liquidity suppliers revise positions, and enhance price discovery. In contrast, pauses do not have a "cool off" effect on markets, but rather accelerate volatility and bid-ask spreads. This implies a regulatory trade-off between the protective role of trading pauses and their adverse effects on market quality.
Keywords: trading pause, magnet effect, price discovery, volatility, liquidity
JEL Classification: G10, G14, G18
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