Single Stock Circuit Breakers – Issues in Fragmented Markets

Since the May 6, 2010 flash crash in the U.S., appropriate measures ensuring safe, fair and reliable markets become more relevant from the perspective of investors and regulators. Circuit breakers in various forms are already implemented for individual markets to ensure price continuity and prevent potential market failure and crash scenarios. However, coordinated inter-market safeguards have hardly been adopted, but are essential in a fragmented environment to prevent situations, where main markets halt trading but stock prices continue to decline as traders eventually migrate to alternative markets. The objective of this paper is to provide insight into recent circuit breaker implementations, their individual specifications and potential coordination between venues. Further, we empirically study the impact of circuit breakers in a single market and a fragmented market context. We find a decline in market volatility after the circuit breaker, but at the cost of higher implicit trading costs. Moreover, by analyzing trading at the satellite market during the home markets CB, we find market quality and price discovery to be sorely afflicted as traders systematically retreat from trading. Only with the home market reentering trading, the satellite market restores pre circuit breaker market conditions.