Price Dynamics with Circuit Breakers

22 Pages Posted: 2 Jul 2019 Last revised: 18 Mar 2021

See all articles by Sandro Claudio Lera

Sandro Claudio Lera

MIT Media Lab

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC); Swiss Finance Institute; Southern University of Science and Technology; Tokyo Institute of Technology

Date Written: July 1, 2019


We model the dynamics of an asset price in the presence of a circuit breaker.
A circuit breaker is a trading halt imposed by the exchange after the price drops below (or rises above) a pre-specified value within a trading session.
The investors' anticipation of the probability of a halt feedbacks on the price process.
This leads to coupled integral and stochastic differential equations.
With first-order analytical solutions and numerical treatment, the theory predicts an increased price volatility prior to the trigger point,
as has been reported in the empirical literature.
We show that the sole existence of a circuit breaker leads to the negative effect of attracting the price to the circuit breaker level (known as the ``magnet effect'').
We then propose first steps towards a more robust design of circuit breakers.
In particular, we show that a trading halt that is conditioned on a pre-specified volatility level, instead of price level, mitigates the negative side effects of increased volatility.
The methodology proposed in this article serves as starting point for the design of more resilient circuit breaker mechanisms.

Keywords: circuit breaker, trading halt, magnet effect

JEL Classification: G10, G18, C51, C54

Suggested Citation

Lera, Sandro Claudio and Sornette, Didier, Price Dynamics with Circuit Breakers (July 1, 2019). Available at SSRN: or

Sandro Claudio Lera (Contact Author)

MIT Media Lab ( email )

77 Massachusetts Avenue
Cambridge, MA 02139
United States

Didier Sornette

ETH Zürich - Department of Management, Technology, and Economics (D-MTEC) ( email )

Scheuchzerstrasse 7
Zurich, ZURICH CH-8092
41446328917 (Phone)
41446321914 (Fax)


Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4

Southern University of Science and Technology

1088 Xueyuan Avenue
Shenzhen, Guangdong 518055

Tokyo Institute of Technology

2-12-1 O-okayama, Meguro-ku
Tokyo 152-8550, 52-8552

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