A Two-Stage Non Discretionary Trading Suspension Mechanism: Effects on Market Quality

Abstract

We examine the effects of firm-specific trading suspensions triggered by price limit hits on three dimensions of market quality: trading activity, return volatility, and price efficiency. The empirical analysis is based on a sample of trading halts on the Italian market (Borsa Italiana) and compare the results under two trading suspension regimes. Our preliminary results reveal mixed evidence. Consistently with previous studies, we find unusually higher levels of both volume and volatility after the halt. Differently from previous studies, we find abnormally higher levels of volume prior to the halt. No significant effect has been found on price efficiency. The nonstandard procedure used by Borsa Italiana to halt trading in case of limit hits allows us to at least partially disentangle the effects of the trading halt itself from the effects of the way in which trading is halted and then resumed after the halt. Type 1 trading halts resume trading with a continuous market, while type 2 trading halts employs a batch call auction to restart trading after the suspension. By comparing type 1 and type 2 trading halts two main results arise. First, type 2 halts always show larger abnormal volume measures than type 1. Second, type 2 halts show lower post-halt abnormal volatility than type 1. This might be explained by the difference in the way the market restarts after the halt. Type 2 allows for wider information dissemination, whereas with type 1 the price discovery process takes place only through the continuous trading. Finally, the call auction reopening procedure of type 2 halts seems to have a stronger cool off effect.