Friday, January 17, 2014
James Brugler and Oliver B. Linton have posted Circuit Breakers on the London Stock Exchange: Do They Improve Subsequent Market Quality? on SSRN with the following abstract:
This paper uses proprietary data to evaluate the efficacy of single-stock circuit breakers on the London Stock Exchange during July and August 2011. We exploit exogenous variation in the length of the uncrossing periods that follow a trading suspension to estimate the effect of auction length on market quality, measured by volume of trades, frequency of trading and the change in realised variance of returns. We also estimate the effect of a trading suspension in one FTSE-100 stock on the volume of trades, trading frequency and the change in realised variance of returns for other FTSE-100 stocks in the same industrial sector. While we find that auction length has a significant detrimental effect on market quality for the suspended security, we also show that trading suspensions help to ameliorate the spread of market microstructure noise and price inefficiency across securities. In both cases we find asymmetric effects in rising and falling markets with suspensions only having a significant impact in the latter case. Although trading suspensions may not improve the trading process within a particular security, they do play an important role preventing the spread of poor market quality across securities and therefore can be effective tools for promoting market-wide stability.