The European Securities and Markets Authority has published a working paper setting out its findings on the market impacts of “circuit breakers”, instruments used by trading venues to interrupt excessive price movements in financial instruments. The revised Markets in Financial Instruments Directive places obligations on national regulators to require a regulated market in their jurisdiction to be able to temporarily halt or constrain trading if there is significant price movement in a financial instrument on that market during a short period and, in exceptional cases, to be able to cancel, vary or correct any transaction. The regulated market must report the parameters for halting trading and any material changes to those parameters to the national regulator. The authors of the working paper reviewed a sample of 10,000 instances when circuit breakers were used between April and December 2016 to assess the impact they had in combatting sudden price swings in financial markets. It was found that price volatility was significantly lower after the CB, bid-ask spreads widened and the price discovery process was not negatively affected. The working paper notes that a better understanding of the complexity of potential dynamic interactions between CBs and markets events is required, in particular in relation to: (i) the incidence of flash crashes and potential feedback loops between high-frequency traders and algorithms; (ii) the interaction between cascading price movements and the changing regulatory landscape of CBs in extreme market conditions; and (iii) potential feedback loops between different CBs.
View ESMA's working paper on the market impacts of circuit breakers.
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