Is There a Magnet Effect of Rule-Based Circuit Breakers in Times of High-Frequency Trading?

36 Pages Posted: 4 Jun 2018 Last revised: 11 Sep 2019

See all articles by Benjamin Clapham

Benjamin Clapham

Goethe University Frankfurt Faculty of Economics and Business Administration

Date Written: July 30, 2018

Abstract

This paper studies whether rule-based circuit breakers in the form of short-lived volatility interruptions exhibit a magnet effect in times of high-frequency trading. Based on a sample of 3,271 volatility interruptions on two major European venues, we analyze whether trading aggressiveness, trading activity, and volatility accelerate close to volatility interruptions indicating a magnet effect. Although the duration of the interruptions is meaningful given today's high-frequent securities markets, we do not find any evidence for a magnet effect. Rather, our results show that trading aggressiveness, trading activity, and volatility gradually slow down towards the triggering threshold and that price changes even revert in case of downward-triggered interruptions. These findings hold both for different levels of high-frequency trading activity and for disclosed and undisclosed price limits triggering the circuit breaker.

Keywords: Circuit Breaker, Volatility Interruption, Magnet Effect, Gravitational Effect, High-Frequency Trading

JEL Classification: G14, G15, G18

Suggested Citation

Clapham, Benjamin, Is There a Magnet Effect of Rule-Based Circuit Breakers in Times of High-Frequency Trading? (July 30, 2018). Available at SSRN: https://ssrn.com/abstract=3190316 or http://dx.doi.org/10.2139/ssrn.3190316

Benjamin Clapham (Contact Author)

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

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

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