Do Market-Wide Circuit Breakers Calm the Markets or Panic Them?

Abstract

Market-wide circuit breakers (MWCBs), which halt trading for 15 minutes across all U.S. stock exchanges, were triggered four times in March 2020. We provide some of the first evidence on the effectiveness of MWCBs using a difference-in-differences approach with tick history data. Although MWCBs increase stocks’ realized volatility and quoted spread immediately after markets reopen, they boost stocks’ trading volume and especially shore up purchases of the stocks that are hit hard. When we extract the time stamps of stock trading surrounding the trading halts, we find the market opening and reopening mechanisms of different stock exchanges complicate the operation of MWCBs. In sum, our results suggest that the MWCBs help to stabilize the markets despite aggravating the trading environment initially.

Keywords: Circuit Breakers, Volatility, Liquidity, COVID-19

JEL Classification: G01, G14, G10