Circuit Breakers on the London Stock Exchange: Do they improve subsequent market quality?

Abstract

This paper uses proprietary data to evaluate the ecacy 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 eect 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 eect 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. We find that auction length has a significant detrimental eect on market quality for the suspended security when returns are negative but no discernible eect when returns are positive. We also find that trading suspensions help to ameliorate the spread of market microstructure noise and price ineciency 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 eective tools for promoting market-wide stability.