centre for microdata methods and practice

ESRC centre

cemmap is an ESRC research centre

ESRC

Keep in touch

Subscribe to cemmap news

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

Authors: James Brugler and Oliver Linton
Date: 20 February 2014
Type: cemmap Working Paper, CWP07/14
DOI: 10.1920/wp.cem.2014.0714

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 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. Download full version

Publications feeds

Subscribe to cemmap working papers via RSS

Search cemmap

Search by title, topic or name.

Contact cemmap

Centre for Microdata Methods and Practice

How to find us

Tel: +44 (0)20 7291 4800

E-mail us