The Effect of Single-Stock Circuit Breakers on the Quality of Fragmented Markets

Gomber, Peter; Haferkorn, Martin; Lutat, Marco; Zimmermann, Karsten

doi:10.1007/978-3-642-36219-4_5

Cited by 17 publications

(15 citation statements)

References 20 publications

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“…We have shown that turnover on alternative venues substantially decreases as traders refrain from trading on alter-native venues until the price signal of the main markets returns with the end of the volatility interruption. This result is in line with the findings of Gomber et al (2013) who investigated an isolated period of low fragmentation.…”

Section: Discussionsupporting

confidence: 92%

“…Studying CBs in the fragmented European market system, Gomber et al (2013) investigate whether there are trading volume shifts to the largest alternative venues during times of activated CBs in the form of volatility interruptions on the dominant market Deutsche Boerse. Based on their data of 2009, a period of early and relatively low fragmentation in Europe, they reject the hypothesis of inter-market volume migration in case of non-coordinated CBs and consequently do not find evidence for a volatility spillover.…”

Section: Coordination Of Circuit Breakersmentioning

confidence: 99%

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Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets

2017

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The introduction of the Markets in Financial Instruments Directive (MiFID I) in November 2007 fostered the competition between incumbent exchanges and emerging alternative venues. This increased competition resulted in a fragmented market landscape, which benefits market participants due to decreasing explicit transaction costs. However, market fragmentation is also associated with drawbacks for regulators and market participants since liquidity and price discovery are split across different trading venues.One particular issue in fragmented markets are safeguards such as circuit breakers, which aim to prevent extreme price jumps and excessive volatility. If a stock is traded on multiple venues, these circuit breakers might forfeit their effectiveness to manage excess volatility when they are not coordinated among different venues.Therefore, we provide new empirical insights concerning the discussion of circuit breaker coordination and analyze volume migration, shifts in market shares, and volatility spillovers during volatility interruptions in European securities markets. A volatility interruption is a specific type of circuit breaker that interrupts continuous trading with an unscheduled call auction. We observe that during volatility interruptions on the main market, turnover on the alternative venues almost dries out although there is no active circuit breaker on the alternative venues. Moreover, the market share of the main market increases sharply during the auction of the volatility interruption. Thus, the main market is therefore of major importance during turbulent times. By analyzing factors influencing the shift of market shares during volatility interruptions on the main market, we are able to trace back the increasing importance of the main market during these times to two different phenomena: the level of market fragmentation and the level of HFT activity.On the one hand, our results reveal that if a circuit breaker is triggered, traders either refrain from trading on the alternative venues or, if they trade, they prefer to participate in the call auction on the main market. On the other hand, we highlight that multi-market market making and arbitrage trading strategies of high-frequency traders get constrained and become more risky in the absence of the main market because an important price signal is missing and rebalancing their inventories gets too expensive.Consequently, our results provide empirical support against the hypothesis and often claimed concern that volume migrates from the main market to alternative venues during a circuit breaker on the main market. A coordination of circuit breakers among venues does not seem to be necessary because markets are implicitly coordinated due to traders' behavior. January 27, 2017 Coordination of Circuit AbstractWe study circuit breakers in a fragmented, multi-market environment and investigate whether a coordination of circuit breakers is necessary to ensure their effectiveness. In doing so, we analyze 2,337 volatility interruptions on Deutsche Boer...

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Section: Discussionsupporting

confidence: 92%

Section: Coordination Of Circuit Breakersmentioning

confidence: 99%

Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets

2017

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“…German High-Frequency Trading Law). Besides, various European trading venues provide in-house implementations based on very similar volatility interruption models as listed by Gomber, Lutat, Haferkorn, and Zimmermann (2011).…”

Section: European Volatility Interruption Detailsmentioning

confidence: 99%

Price Discovery in European Volatility Interruptions

Zimmermann

2013

SSRN Journal

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We study a special form of securities market circuit breaker, i.e., European volatility interruptions. Instead of halt trading like traditional circuit breaker, these short-living call auctions allow for continual price discovery after price limit hits. Based upon approximately 1,800 Xetra volatility interruption events from 01/2009 to 01/2012, we empirically assess whether such auctions contribute to price uncertainty resolution and how they inuence post-auction continuous trading. We nd that volatility interruptions dissolve on average 36 percent of the pre-interruption price uncertainty. In addition, our results provide strong indications that this level of price discovery is a major determinant in shaping post-interruption market quality as subsequent continuous trading benets conditionally on the price discovery contribution of the interruption. By analyzing drivers of volatility interruption price discovery, our results give indications that in contrast to a prolongation of the call phase, foremost traders' participation does promote the auction's ability to display a price relevant for future trading.

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“…Further as we are unable to identify the counterparties to each trade, we cannot make any conclusions regarding the trading patterns of different classes of investors (such as high frequency traders or investment banks) around trading suspensions. We also would like to understand how trading may or may not migrate to alternative venues such as multilateral trading facilities (MTFs) during a suspension in the primary market as many important MTFs do not have pre-specified systems in place in order to coordinate with the primary exchange during a suspension (Gomber et al, 2013). …”

Section: Resultsmentioning

confidence: 99%

Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality?

Brugler

Linton

2014

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Standard-Nutzungsbedingungen:Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden.Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen.Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in AbstractThis 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 realized 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 realized variance of returns for other FTSE-100 stocks. We find that auction length has a significant detrimental effect on market quality for the suspended security when returns are negative but no discernible effect when returns are positive. We also find that trading suspensions help to ameliorate the spread of market microstructure noise and price inefficiency across securities during falling markets but the reverse is true during rising markets. 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 in falling markets and therefore can be effective tools for promoting market-wide stability.

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The Effect of Single-Stock Circuit Breakers on the Quality of Fragmented Markets

Cited by 17 publications

References 20 publications

Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets

Coordination of Circuit Breakers? Volume Migration and Volatility Spillover in Fragmented Markets

Price Discovery in European Volatility Interruptions

Single stock circuit breakers on the London Stock Exchange: do they improve subsequent market quality?

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