Circuit Breakers and Other Market Safeguards

Abstract

Exchanges employ various methods, including circuit breakers, trading halts, and price limits, to maintain fair and orderly trading and market integrity. The COVID-19-induced market volatility in March 2020 reignited interest in circuit breakers, prompting the World Federation of Exchanges (WFE) to conduct a research project to better understand their effectiveness and design. This paper analyzes a survey of the WFE members, revealing that circuit breakers, along with price limits, are commonly used safeguards, with 86% of surveyed exchanges employing them, although variations exist in design and calibration. We find that circuit breakers are more prevalent in cash markets (84%) compared to derivatives markets (67%). While 67% of respondents confirm circuit breaker triggers during March 2020, only 30% are considering calibration adjustments, and coordination across venues or jurisdictions is not a priority. Participants deem the correct calibration of circuit breakers as the most pertinent practical concern in market safeguards, followed by assessing their effectiveness.

Keywords: Circuit breakers, volatility control mechanisms, price limits, survey, exchange

JEL Classification: G10