Circuit Breakers and Market Quality

WFE RESEARCH WORKING PAPER no. 3

19 Pages Posted: 20 Jun 2022 Last revised: 12 Sep 2023

See all articles by Kaitao Lin

Kaitao Lin

World Federation of Exchanges

Pedro Gurrola-Perez

World Federation of Exchanges

Bill Speth

World Federation of Exchanges

Date Written: April 1, 2022

Abstract

In March 2020, the U.S. security market experienced heightened volatility induced by the COVID-19 pandemic, and market-wide circuit breakers were triggered on four occasions. Relying on high-frequency intraday trade and quote data, we investigate the market conditions around these trading halts to shed light on the effectiveness of circuit breakers. We find that, on average, stock returns stabilize, trading cost reduces, selling pressure resolves, and prices become more informative after trading resumes from the market-wide trading halts. Moreover, we provide evidence that traders tend to hold back from aggressive trading right before the trading halts, which is inconsistent with the circuit breakers causing panic (the magnet effect). Also, when compared with single-stock halts, market-wide trading halts are associated with a more significant reduction in selling pressure and panic trading. In a subsample analysis, we document that index membership and index fund trading do not have additional impacts on market quality during trading halts. Overall, our findings point to the efficacy of the circuit breakers as a well-designed safeguarding mechanism employed by the exchanges.

Keywords: Circuit breakers, COVID-19, market quality, market-wide circuit breakers, Limit Up/Limit Down

JEL Classification: G01, G10, G14

Suggested Citation

Lin, Kaitao and Gurrola Perez, Pedro and Speth, Bill, Circuit Breakers and Market Quality (April 1, 2022). WFE RESEARCH WORKING PAPER no. 3, Available at SSRN: https://ssrn.com/abstract=4132469 or http://dx.doi.org/10.2139/ssrn.4132469

Kaitao Lin (Contact Author)

World Federation of Exchanges ( email )

125 Old Broad Street
London, EC2N 1AR
United Kingdom

Pedro Gurrola Perez

World Federation of Exchanges ( email )

125 Old Broad Street
London, EC2N 1AR
United Kingdom
EC2N 1AR (Fax)

HOME PAGE: http://www.world-exchanges.org

Bill Speth

World Federation of Exchanges ( email )

125 Old Broad Street
London, EC2N 1AR
United Kingdom

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