Circuit breakers as market stability levers: A survey of research, praxis, and challenges - Imtiaz Sifat

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Circuit breakers as market stability levers: A survey of research, praxis, and challenges - Imtiaz Sifat
Received: 17 April 2018      Revised: 16 August 2018     Accepted: 10 September 2018
DOI: 10.1002/ijfe.1709


Circuit breakers as market stability levers: A survey of
research, praxis, and challenges

Imtiaz Mohammad Sifat                          | Azhar Mohamad

Department of Finance, Kulliyyah of
Economics and Management Sciences,
International Islamic University Malaysia,             Circuit breaker, an automated regulatory instrument employed to deter panic,
Kuala Lumpur, Malaysia                                 temper volatility, and prevent crashes, is controversial in financial markets.
                                                       Proponents claim it provides a propitious time out when price levels are
Imtiaz Mohammad Sifat, Department of                   stressed and persuades traders to make rational trading decisions. Opponents
Finance, Kulliyyah of Economics and                    demur its potency, dubbing it a barrier to laissez‐faire price discovery process.
Management Sciences, International
Islamic University Malaysia, Kuala                     Since conceptualization in 1970s and practice from 1980s, researchers focused
Lumpur 53100, Malaysia.                                mostly on its ability to allay panic, interference in trading, volatility transmis-
                                                       sion, prospect of self‐fulfilling prophecy through gravitational pull towards
Funding information                                    itself, and delayed dissemination of information. Though financial economists
Ministry of Higher Education Malaysia;                 are forked on circuit breakers' usefulness, they are a clear favourite among reg-
Research Management Centre of Interna-
tional Islamic University Malaysia, Grant/
                                                       ulators, who downplay the reliability of anti‐circuit breaker findings citing,
Award Number: FRGS 15‐232‐0473                         inter alia, suspect methodology, and lack of statistical power. In the backdrop
                                                       of 2007–2008 Crisis and 2010 Flash Crash, the drumbeats for more regulatory
JEL Classification: D43; D47; D53
                                                       intervention in markets grew louder. Hence, it is unlikely that intervening
[Correction added on 14 November 2018,                 mechanism such as circuit breakers will ebb. But are circuit breakers worth
after first online publication: The
                                                       it? This paper synthesizes three decades of theoretical and empirical works,
reference Clapham, B., Gomber, P.,
Haferkorn, M., & Panz, S. (2017).                      underlines the limitations, issues, and methodological shortcomings
Managing Excess Volatility: Design and                 undermining findings, attempts to explain regulatory rationale, and provides
Effectiveness of Circuit Breakers. SSRN.
                                                       direction for future research in an increasingly complex market climate.
have been added to this version].
                                                       circuit breakers, financial markets, price limits, trading halts

1 | INTRODUCTION                                                                       they arise out of market agent"s' own volition, the imposi-
                                                                                       tion of circuit breakers is a regulatory compulsion.
An efficient market, where participants have access to all                             Inspired by electrical engineers who use an automated
information, should not incur heavy overreaction or                                    switch to protect a circuit from current overload, imposi-
underreaction leading to unreasonable volatility. Such a                               tion of collars on security prices as a market stability lever
market would facilitate price signals commensurate with                                gained popularity in the 1980s. Regulators claim its pur-
change in fundamentals. Real‐world markets, however,                                   port is to deter overreaction, enforce control, prevent
exhibit imperfections, where irrational ex ante and ex post                            crashes, minimize volatility, and protect liquidity pro-
effects of news are observed. Supply and demand are mis-                               viders. The aftermath of Black Monday crash of October
matched, leading to order imbalance, and potentially                                   1987 helped propel circuit breaker praxis to limelight as
abnormal volatility. Price discovery is impeded. Although                              an independent regulatory tool. Attention resurfaced after
these imperfections are organic in nature, in the sense that                           the 2007–2008 financial crisis and again in May 2010

Int J Fin Econ. 2018;1–40.                                                   © 2018 John Wiley & Sons, Ltd.   1
2                                                                                                         SIFAT AND MOHAMAD

following a high‐frequency trading linked flash crash.           2.1 | Circuit breaker
More recently, flash crashes in cryptocurrency exchanges
                                                                 A circuit breaker is an umbrella term in financial eco-
thrusted cries for circuit breakers. Case in point: the flash
                                                                 nomics for a host of regulatory levers employed by secu-
crash in GDAX exchange that saw Ethereum price nose-
                                                                 rity market custodians to temper volatility, prevent
dive from $317.81 to $0.10 in a matter of 45 ms. In view
                                                                 crash scenarios emanating from inordinate investor over-
of these developments, concern is growing afresh among
                                                                 reaction or malfunctioning algorithm, and to preserve
regulators, investors, and academics about usefulness of
                                                                 market integrity. In financial markets, following a sub-
circuit breakers, magnified by potential for exacerbated
                                                                 stantial price movement, circuit breakers pause or end
volatility due to growing fragmentation of financial mar-
                                                                 trade earlier to allow market participants a time out to
kets. Accordingly, stakeholders in advanced financial mar-
                                                                 contemplate the fundamentals, gather information, assess
kets are seeking new mechanisms to handle high
                                                                 positions, and make rational decisions. Moreover, partic-
uncertainty periods to avert crashes. Meanwhile, in
                                                                 ipants not yet in the market receive an opportunity to
emerging markets, circuit breakers are, in terms of param-
                                                                 provide or add liquidity. Regulators hope this would for-
eters, relatively vanilla. Yet the rate of adoption since mid‐
                                                                 fend panic, ease price discovery during market duress,
1990s has been staggering. In fact, the first exhaustive
                                                                 and protect liquidity providers. Most common forms of
review of circuit breakers' efficacy contained few prece-
                                                                 circuit breakers are price limits and trading halts.
dents—mostly North American (Harris, 1997). The next
formal survey by Kim and Yang (2004), detailing what
makes them so attractive to regulators, included 20              2.2 | Price limit
venues. Most recently, Abad and Pascual's (2013) book
chapter, focusing on an overarching theme of holding             A price limit refers to the maximum stipulated magnitude
back volatility in markets via circuit breakers, reports sim-    by which price may deviate from a reference price. Thus,
ilar number of venues. This paper's methodology and              price limits effectively establish a band of tolerable prices
approach in organizing empirical literature benefits from        for a certain period. Depending on the reference price,
Abad and Pascual's (2013) template and lists over 100            which can be last session or day's settlement price, or last
active circuit breakers. Our paper advances the discourse        executed price within the same session, price limits estab-
further by underscoring the challenges in circuit breaker        lish a channel of acceptable percentage (or ticks) by
research stemming from theoretical difficulties in               which price may vary. Some index futures are subjected
distinguishing between multifold explanations and                to a price limit designating a deviation band before cash
stresses the need for experimental studies. Also, we sug-        market opens. The peak and trough of the channel are
gest avenues for extending the conventional approach             called “limit up” and “limit down.” Limits can be daily
and underscore the need for incorporating alternative            (interday, static) or intraday (dynamic). Some markets
and preventive mechanisms from a regulatory standpoint.          are known to concurrently employ daily and intraday
Lastly, the paper's novelty includes the roles of high fre-      limits. The earliest documented use of price limit was in
quency algorithmic trading nexus within circuit breaker          Dojima exchange in Japan in 18th century (West, 2000).
discourse, while prognosticating potential sources of dis-
ruption from nascent technologies such as Blockchain.
                                                                 2.3 | Trading halt
    This paper is organized the following way. First, we pro-
vide definitions of the key, germane terms used in this field.   Trading halt refers to a temporary suspension of continu-
Next, we discuss the appeal of circuit breakers to regulators,   ous trading for a single security, a group of securities, an
followed by a discussion of its merits and demerits. Then,       exchange, or a group of exchanges usually (but not
we detail the theoretical work done in this field, followed      always;e.g., the EU) under the ambit of the same regula-
by analysis of empirical studies on key hypotheses. Then         tor. It is used to redress—or in anticipation of—market
we discuss the methodological constraints plaguing               disorder; for example, impending corporate announce-
research in this area that makes the findings suspect to reg-    ment or news, or to remedy order imbalance. During a
ulators. Finally, we offer direction for future research.        halt, open orders can be cancelled, and options exercised.
                                                                 Halts may be discretionary or rule‐based (automatic). For
                                                                 the former, market operator exercises its discretion to halt
2 | TERMINOLOGY                                                  trading of a security to allow investors equal opportunity
                                                                 to appraise news and make informed decisions on its
Some of the basic, technical jargons used in this paper are      basis—typically ahead of important or relevant news. It
defined here for convenience of non‐specialist economists        can also arise out of suspicion over irregular activity
and the uninitiated.                                             regarding the asset's price. Rule‐based halts, contrarily,
SIFAT AND MOHAMAD                                                                                                                              3

are activated upon matching predetermined parameters.                             Moreover, price discovery during a VI‐triggered auction
For example, a stock's trading may be automatically                               occurs via publishing auction prices and volumes. Lastly,
halted once a price limit is reached. These halts are tem-                        unlike halts which last for considerable amount of time
porary in nature and easier to anticipate compared to dis-                        and sometimes for the whole trading day, VIs typically
cretionary halts, which allows participants to alter their                        last only a few minutes. In this way, VI can be argued
trading behaviour and strategy keeping in mind prospects                          to be more conducive to derivatives pricing and index
of trade stoppage since. Though rule‐based halts are more                         calculations.
common compared with discretionary halts, and shorter                                 Figure 1 summarizes various forms of circuit breakers
in duration, exchanges can extend them at their                                   employed around the world.

                                                                                  3 | R E GU LA T OR Y P R A X I S
2.4 | Volatility interruption
                                                                                  Exchanges have experimented with circuit breaker mech-
Unlike the circuit breakers popularized in North Amer-                            anisms since the 1970s. However, the practice was dimin-
ica, European exchanges began experimenting in the                                utive in scope and received little attention. Following the
1990s with a mechanism which suspends continuous                                  Black Monday crash of 1987, the recommendation of
trading and switches to a call auction (or an extension                           Brady Commission's 1988 Report catapulted the practice
of call auction if interruption occurs during the auction)                        to prominence, leading to greater adoption by exchanges
if the next potential price falls beyond a predefined range                       of asset‐specific and market‐wide variants. Most
based on a reference price. This mechanism, volatility                            exchanges set their own thresholds for halts and/or
interruption (VI), differs from traditional circuit breakers                      limits. Halts can be sudden‐death (once triggered, trade
in several ways. Firstly, VIs are not enforceable market‐                         stops for the day/session;e.g., Kuala Lumpur Stock
wide. Rather, they are enacted on individual securities.                          Exchange in the 1990s) or progressive (multi‐tiered). An
This means triggering a VI only impacts that instrument                           example of a progressive halt mechanism is the NYSE:
and not the whole market. Nonetheless, if the affected                            If S&P falls by 7%, a Level 1 circuit breaker is triggered,
security is a bellwether or industry leader, it can poten-                        and the entire market's trade is halted for 15 min. Upon
tially spillover, making unintended consequences.                                 resumption, a drop of 13% triggers second halt—also for

                                                                                                            % Based Trigger
                                                                                                          Price Based Trigger
                                                                                                                % Based Trigger
                                             Price Limits                                                   Price Based Trigger


                                                                                      Regulatory                         News
                        Circuit Breakers

                                                                                       Exchange Triggered               Order Imbalance

                                            Trading Halts                                                              Discretion

                                                                                         Progressive Tiered
                                                 Volatility          Static and Dynamic Limit
                                               Interruptions                  Triggers

                                                                                           Course: Continuous Auction
                                               Hybrid          Limits / Halts / VIs
                                                                                                  Course: Discrete Auction

FIGURE 1 Types of circuit breakers in practice in exchanges around the world. The above image summarizes the various types of circuit
breakers currently in use by exchanges around the world. Although the choice of which mechanism to use remained quite simplistic at the
outset of regulatory experimentation, nowadays it is common to see a varieties of circuit breakers to be employed concurrently. This means
price limits and trading halts apply to the same securities, or a group of securities, or the market as a whole. The grey boxes indicate sources
and/or rationales for triggering the corresponding circuit breaker mechanism
4                                                                                                         SIFAT AND MOHAMAD

15 min. If the market falls by 20% later, the whole market          Table 1 provides a continent‐wise overview of circuit
shuts down for remainder of the day. As for security‐            breaker practices in exchanges around the world.
specific collars, London Stock exchange imposes a 5‐min
Automatic Execution Suspension Period if the acceptable
price band (5% to 10% above or below last automated book         4 | P R O S A N D CO N S O F CI R C U I T
trade—depending on the stock's market capitalization) for        BREAKERS
a security is breached. These limits can be set for all stocks
indiscriminately, or be different based on size of the           The integrity of a financial market relies heavily on the
company, price size, industry, or a host of discretionary        integrity of pricing. Prices determine worth, dictate where
reasons. The UK's LSE practice is also known as a VI             savings will be mobilized and channelized, resources will
mechanism, which is very popular in Europe. Some                 should be allocated, and liquidity will be sought or pro-
exchanges also outright reject orders beyond the stipulated      vided. Thus, when a market fails to facilitate price discov-
price range; for example, Amman Stock Exchange, Bursa            ery and signalling to the extent that supply and demand
Malaysia, Colombo Stock Exchange, and Tadawul (Saudi             no longer are the key determinants, a problem emerges.
Arabia).                                                         Therefore, regulatory intervention to iron out such kinks
     The practice of circuit breaks across exchanges vary in     has merit. Nonetheless, whether the employed mecha-
other ways as well. For instance, exchanges such as USA's        nisms have untoward consequences or fail to achieve pro-
NYSE, Canada's TSX, and Brazil's BOVESPA exempt                  fessed objectives—or worse, impair market quality—
markets from circuit breakers in the final hour of the           warrants examination. The debate of whether circuit
day's trading. Some exchanges halt trade for the day upon        breakers are merited depends on a variety of factors:
first trigger of the limit, whereas others allow multiple
trigger hits. Some exchanges allow pricing of a halted           • Type   of circuit breaker
security via discrete trading mechanism (call auction)             • Is   it a price limit or a trading halt?
upon triggering a daily (static) or intraday (dynamic)             • Is   it a call auction?
limit.                                                             • Is   it discretionary or rule based?
     Particularly interesting among the circuit breaker
mechanisms is the American experimentation with a pilot          • Triggering mechanism
scheme that later crystallized into a Limit‐up‐Limit‐down          • Is it induced by order?
(LULD) Breaker. The flash crash in May 2010 is                     • Is it induced by volume?
considered the main precursor to the LULD mechanism.               • Is it induced by price?
This pilot scheme enacted a 5‐min halt in instruments
exhibiting excessive fluctuations within a 5‐min trading
window to accommodate better absorption of fundamen-             As of 2018—the time of writing this paper—data col-
tals and news, with the tolerable limit set at ±10%. Though      lected for Table 1 in this paper indicate 48 trading halts,
initially this applied to S&P 500 stocks, a year later the       98 price limits, and 31 VI mechanisms active among the
spectrum of subject stocks was expanded to all domestic          studied 152 exchanges, with some venues opting for mul-
listings. Keeping in mind that the flash crash may have          tiple, overlapping, and/or discretionary schemes. In 16
been triggered by a fat finger error, curiously, the pilot       cases, continuous trading is paused, leading to an auc-
scheme detected that the LULD breaker was being                  tion. Meanwhile, with regard to trigger parameter, 11
prompted too often due to trading errors. Nonetheless,           venues activate the circuit breaker on discretionary basis;
the pilot scheme was formalized as an official firewall          meaning preset values are not publicly disclosed.
against volatility a year later in May 31, 2012, whereas             Historically, the Brady Commission Report, sanc-
regulators simultaneously modified 1989's circuit breaker        tioned by Reagan administration in 1988 to uncover
rules for the whole market. The LULD breaker introduced          why the 1987 crash happened, was the first formal paper
a concept of “limit state,” which comes alive when               to advocate market‐wide and individual circuit breakers.
qualifying stocks enter a quotation period of 15 s if the        Latter proponents invoked the cooling‐off hypothesis
National Best Offer equals the lower price band (but does        propounded by Ma, Rao, and Sears (1989), which argued
not exceed National Best Bid), or the National Best Bid          circuit breakers could enforce price stability by curbing
equals upper price band (without crossing National Best          large price swings caused by speculative overreaction,
Offer.) When a stock is in a limit state, new reference          avert panic, and dissuade price manipulation. Advocates
prices or bands are calculated. The affected instrument          also argue that traders' ability to modify or withdraw
emerges from limit state when the entire size of all limit       standing limit orders during the halt enables informed
state quotations is executed or withdrawn.                       traders to manage their risk without incurring losses,
TABLE 1    Overview of circuit breaker practices around the world

Exchange                        Symbol       City          Country         Static Limit           Dynamic Limit Remarks
Panel A: Asia

Shanghai Stock Exchange         SSE          Shanghai      China (Mainland) ±10% (PL)             None            Applies to A‐Shares and mutual funds
                                                                            ±5% (PL)              None            Applies to special treatment (ST) and B‐Shares
                                                                                                                                                                                       SIFAT AND MOHAMAD

                                                                            None                  None            For new listings, closed‐end funds, shares whose
                                                                                                                    listing is resumed after suspension, and
                                                                                                                    relisted shares.
Shenzen Stock Exchange          SZSE         Shenzen       China (Mainland) ±10% (PL)             None            Applies to A‐Shares and mutual funds
                                                                            ±5% (PL)              None            Applies to special treatment (ST) and B‐Shares
                                                                                                                  MWTH became effective on 01/01/16 subject to
                                                                                                                   fluctuation of the CSI 300 (SHSZ300 Index).
                                                                                                                   Suspended on 08/01/16.
Hong Kong Stock Exchange        HKEX         Hong Kong     Hong Kong       ±24 nominal spreads    9σ and ± 5%     Applies to price deviations in opening session and
                                                                                                                   closing sessions respectively.
                                                                           (PL)                                   No longer applies to derivatives as of January 2017.
Tokyo Stock Exchange            TSE          Tokyo         Japan           ±¥30–¥7000000          None            Absolute Yen values depending on price day's closing
                                                                                                                    price or special quote
                                                                           (PL) (TH)                              TSE allows two 15‐min market‐wide circuit breakers
                                                                                                                    for extreme price moves at its discretion
Osaka Securities Exchange/      OSE          Osaka         Japan           8–21%                  None            Normal: 8%/13% for stock exchange futures/options
  JASDAQ                                                                                                           (12%/17% and 16%/21% for successive expansions).
                                                                           (PL) (TH)                              OSE/JASDAQ has a 2000‐point absolute limit.
Chi‐X Japan                     CHIJ         Tokyo         Japan           ±10% (PL)              None            Single‐stock circuit breaker.
Mongolian Stock Exchange        MSE          Ulan Bator    Mongolia        Discretionary (TH)     Discretionary
Korea Exchange                  KRX          Busan         Korea           ±15% (Equities) (PL)   None
                                                                           10–20–30% (PL)         None            Single Stock Futures
Taiwan Stock Exchange           TSE          Taipei        Taiwan (ROC)    ±10% (PL)              None            Applies to domestic and foreign stocks, REITs, ETFs,
                                                                                                                    Futures. Reference price is based on day's opening auction
                                                                           ±5% (PL)               None            Corporate bonds without warrants. Those with warrants
                                                                                                                    are subject to a limit price of opening price * (1 ± 5%)
                                                                                                                    + (limit‐up price
                                                                                                                  of underlying security for that day–auction reference price
                                                                                                                    at opening for underlying security) * Exercise ratio
Cambodia Securities Exchange    CSX          Phnom         Cambodia        ±5% (PL)               None
Indonesia Stock Exchange        IDX          Jakarta       Indonesia       ±10%, ±15%. ±20% (TH) None             Market‐wise trading halt. Level 1 incurs 30‐min halt.


TABLE 1 (Continued)

Exchange                        Symbol   City         Country       Static Limit         Dynamic Limit Remarks
Panel A: Asia
                                                                                                      Level 3 causes blanket suspension until approval is
                                                                                                        receives from regulator.
                                                                    ±20%, ±25%, ±35% (PL) None        Asset‐specific price limits in place via automated
                                                                                                        order rejection.
Lao Securities Exchange         LSX      Vientiane    Laos          ±10% (PL)            None
Bursa Malaysia                  MYX      Kuala        Malaysia      ±30% (PL, TH)        ±8%          FBMKLCI is subject to 1 hour of trading halt if down
                                          Lumpur                                                        by 10%. 20% fall thereafter is a day‐long halt.
                                                                                                      ±30% applies to stocks priced above MYR 1.00. For
                                                                                                        stocks priced MYR 0.99 or less, limit is MYR 0.30
                                                                                                        (in nominal terms).
Malaysia Derivatives Exchange   BMDB     Kuala        Malaysia      ±10% (PL)            None         Not applicable to spot month trades of futures.
Myanmar Securities Exchange     MSEC     Yangon       Myanmar       Hierarchical (PL)    None         Based on absolute MMK value.
Philippine Stock Exchange       PSE      Manila       Philippines   50% up, 40% down     ±10%
Singapore Stock Exchange        SGX      Singapore    Singapore     (PL)                 ±10%         Circuit breaker on single security at and above
                                                                                                        $0.50: ±10% from the reference price.
                                                                                                      5‐min cooling‐off period follows during which trading
                                                                                                        can only take place within the ±10% price band.
Stock Exchange of Thailand      SET      Bangkok      Thailand      ±10–20% (TH)         None         30 and 60‐min market‐wide trading halts upon first
                                                                                                        and second trigger.
                                                                    ±30% SSPL (PL)       ±1 Price     Main board stocks. ±60% fluctuation is tolerated for
                                                                                                        foreign stocks.
Ho Chi Minh Stock Exchange      HOSE     Ho Chi       Vietnam       ±7% (PL)             None         ±20% on first‐day of IPO listing.
Hanoi Stock Exchange            HNX      Hanoi        Vietnam       ±10% (PL)            None         ±30% on first day of IPO listing.
Afghanistan Stock Exchange      AFX      Kabul        Afghanistan   None                 None
Chittagong Stock Exchange       CSE      Chittagong   Bangladesh    ±3.75–10% (PL)       None         Limits vary according to price size and can
                                                                                                        be applied on nominal values.
Dhaka Stock Exchange            DSE      Dhaka        Bangladesh    ±3.75–10% (PL)       None         Limits vary according to price size and can
                                                                                                        be applied on nominal values.
Royal Securities Exchange       RSEBL    Thimphu      Bhutan        ±15% (PL)            None
  of Bhutan

                                                                                                                                                                          SIFAT AND MOHAMAD
TABLE 1 (Continued)

Exchange                        Symbol    City       Country     Static Limit          Dynamic Limit Remarks
Panel A: Asia
Bombay Stock Exchange           BSE       Mumbai     India       ±10%, ±15%, ±20% (PL) None         Dummy price limits are available for derivatives
                                                                                                                                                                      SIFAT AND MOHAMAD

National Stock Exchange of      NSE       Mumbai     India       ±2%, ±5%, ±10%        None         Market‐wide circuit breaker of 10%, 15%, and 20%.
 India                                                                                               Stock‐wide circuit breakers apply only to scrips
                                                                                                     with no derivative products.
                                                                 (PL, TH)                           ±20% limits apply to debentures and preference shares.
Maldives Stock Exchange         MSE       Male       Maldives    None (TH)             None         Discretionary halt provisions exist
Nepal Stock Exchange            NEPSE     Kathmandu Nepal        3%, 4%, 5% (TH)       None         Market‐wide circuit breaker. Applied for the first time
                                                                                                     on March 28. Still room for changes.
Pakistan                        PSX       Karachi    Pakistan    ±5%, 7.5%, 10% (PL)   None
Colombo Stock Exchange          XCOL      Colombo    Sri Lanka   ±10% (PL, TH)         None         ±5% market‐wide circuit breaker.
Armenian Stock Exchange         NASDAQ.   Yerevan    Armenia     None                  None
Baku Stock Exchange             BFB       Baku       Azerbajan   None                  None
Bahrain Stock Exchange          BFEX      Manama     Bahrain     ±10% (PL)             None         No circuit breaker for mutual funds or bonds.
Cyprus Stock Exchange           CSE       Nicosia    Cyprus      ±10% (PL)             ±3%
Georgian Stock Exchange         SSB       Tblisi     Georgia     None                  None
Tehran Stock Exchange           TSE       Tehran     Iran        ±5% (PL)              None
Iran Fara Bourse                IFB       Tehran     Iran        ±5% (PL)              None
Iraq Stock Exchange             ISX       Baghdad    Iraq        ±20% (PL)             None
Tel Aviv Stock Exchange         TASE      Tel Aviv   Israel      ±8%, ±12%             None         If TA‐25 moves by ±8% in relation to bsic index,
                                                                                                       market‐wide halt for 45 min occurs.
                                                                 (PL, TH)                           If TA‐25 moves by ±12% in relation to bsic index,
                                                                                                       suspension lasts till next business day.
                                                                 ±35% (PL)                          For equities and in convertible bonds during opening phase.
Amman Stock Exchange            ASE       Amman      Jordan      ±5%, ±7%, ±10% (PL,   None         ±5% for 2nd/3rd markets; ±7.5% for 1st market,
                                                                  TH)                                and ± 10% for OTC market.
Boursa Kuwait                   BK        Safat      Kuwait      ±20% (PL)             None         Exchange is in the process of employing dynamic limits
                                                                                                      in nominal terms (KWD or fils).
Beirut Stock Exchange           BSE       Beirut     Lebanon     ±10% (PL)             None         ±15% for Solidere shares
Muscat Securities Market        MSM       Muscat     Oman        ±10% (PL)             None
Palestine Securities Exchange   PSE       Nablus     Palestine   ±5% (PL)              None


TABLE 1 (Continued)

Exchange                         Symbol   City          Country             Static Limit                Dynamic Limit Remarks
Panel A: Asia
Doha Securities Market           DSM      Doha          Qatar               ±10% (PL, TH)               None            Applies both to stocks and index.
Tadawul                          XSAU     Riyadh        Saudi Arabia        ±10% (PL)                   None            Settlement is expected to be T + 2 from late‐2017.
Damascus Securities Exchange     DSE      Damascus      Syria               ±5% (PL)                    None            Previously ±2%
Borsa Istanbul                   ISE      Istanbul      Turkey              ±20% (PL)                   None            Applies to equities and ETFs. ±50% for preemptive rights.
                                                                                                                          No limit for warrants.
                                                                            ±10% (TH)                   None            Market‐wide.
                                                                                                                        For derivatives market (VIOP), daily price limit is defined
                                                                                                                          in contract specifications
Abu Dhabi Securities Market      XADS     Abu Dhabi     UAE                 15% up, 10% down (PL)       None            When a stock falls 5%, the stock goes to auction for 5 mins,
                                                                                                                         and if it falls 9% it goes to auction for 10 min.
Dubai Financial Market           DFM      Dubai         UAE                 15% up, 10% down (PL)       None            ±5% for inactive stocks
NASDAQ Dubai                     DIFX     Dubai         UAE                 Variable (PL)               None            ±50% for AED 0 to 0.1; ±20% for AED ±0.1 to 0.25; ±15%
                                                                                                                         for AED 0.25 to 0.5; ±10% for > AED 0.5.
Kazakhstan Stock Exchange        KASE     Almaty        Kazakhstan          ±15% (PL)                   None            Limits for futures vary between ±30% to ±50%.
Kyrgyz Stock Exchange            KSE      Bishkek       Kyrgyzstan          None                        None
Tashkent Stock Exchange          TSE      Tashkent      Uzbekistan          None                        None
Panel B: Australia (Continent)

Australian Securities Exchange     ASX     Sydney               Australia                  None                  None     Provisions for halt on discretionary basis or at the request
                                                                                                                            of a company or anticipating announcement.
Chi‐X Australia                    CHIA    Sydney               Australia                  None                  None
South Pacific Stock Exchange       SPSE    Suva                 Fiji                       None                  None
New Zealand Stock Exchange         NZSX    Wellington           New Zealand                Variable (PL, TH)     None     Asymmetric asset‐specific limits.
Port Moresby Stock Exchange                Port Moresby         Papua New Guinea           None                  None
Panel C: Africa

Algiers Stock Exchange                      SGBV          Algiers                  Algeria           None               None
Botswana Stock Exchange                     BSE           Gaborone                 Botswana          None               None
Bourse Regionale des Valeurs Mobilieres     BVRM          Abidjan                  Cote D'Ivoire     ±15% (PL)          None       Overnight
The Egyptian Stock Exchange                 EGX           Egyptian Exchange        Egypt             ±10% (VI, TH)      ±5%        30‐min suspension for dynamic limit triggers

                                                                                                                                                                                           SIFAT AND MOHAMAD
TABLE 1 (Continued)

Panel C: Africa
                                                                                      ±5%, ±10% (TH)   None   Temporary market‐wide trading halt if EGX100
                                                                                                                moves by ±5%. Day‐long suspension if ±10%.
Ghana Stock Exchange                        GSE       Accra           Ghana           ±7.5% (PL)       None
                                                                                                                                                                 SIFAT AND MOHAMAD

Nairobi Securities Exchange                 NSE       Nairobi         Kenya           ±10% (PL)        None   Overnight
Libyan Stock Market                         LSM       Tripoli         Libya           None             None
Malawi Stock Exchange                       MSE       Blantyre        Malawi          None             None
Stock Exchange of Mauritius                 SEM       Port Louis      Mauritius       ±8% (PL)         None
Casablanca Stock Exchange                   Casa SE   Casablanca      Morocco         ±10% (VI, TH)    ±6%    Dynamic hit triggers 5‐min suspension. Upon
                                                                                                               resumption another 4% move in same direction
                                                                                                               trade is halted.
Bolsa de Valores de Mozambique              BVM       Maputo          Mozambique      ±15% (PL)        None
Namibian Stock Exchange                     NSX       Windhoek        Namibia         None             None
Nigerian Stock Exchange                     NSE       Lagos           Nigeria         ±10% (PL)        None   Compounded
Abuja Securities and Commodities Exchange   ASCE      Abuja           Nigeria         None             None
Rwanda Stock Exchange                       RSE       Kigali          Rwanda          None             None
Seychelles Securities Exchange (Trop‐X)     SSE       Victoria        Seychelles      None             None
Johannesburg Stock Exchange                 JSE       Johannesburg    South Africa    None             None
Khartoum Stock Exchange                     KSE       Khartoum        Sudan           None             None
Swaziland                                   SSX       Mbabane         Swaziland       None             None
Dar‐es‐Salam Stock Exchange                 DSE       Dar es Salaam   Tanzania        None             None
Bourse des Caleurs Mobilieres de Tunis      BVMT      Tunis           Tunisia         ±6% (PL)         None
Uganda Stock Exchange                       USE       Kampala         Uganda          None             None
Lusaka Stock Exchange                       LuSE      Lusaka          Zambia          ±10% (PL)        None   Overnight
West African Stock Exchange                 BRVM      Abidjan         Cote D'Ivoire   ±7.5% (PL)       None
Zimbabwe Stock Exchange                     ZSE       Harare          Zimbabwe        Undisclosed      None   Implemented from Summer 2016 as part of
                                                                                                                migration to automated trading.
Panel C: North America

Bahamas Securities Exchange          BISX   Nassau        Bahamas       ±10% (PL)         None


TABLE 1 (Continued)

Panel C: North America
Barbados Stock Exchange            BSE     Bridgetown       Barbados           ±15% (TH)       None Market‐wide temporary suspension; currently
                                                                                                      under review
                                                                               ±30% (PL)       ±10% Stock‐specific. Order rejection in place for variations
                                                                                                      beyond 10%.
Bermuda Stock Exchange             BSX     Hamilton         Bermuda            None (PL)       None
Toronto Stock Exchange             TSX     Toronto          Canada             7%, 13%, 20%    ±10% Market‐wide trading halts occur if S&P 500 or TSX drops
                                                                                                      by 7% (Level 1), 13% (Level 2), and 20% (Level 3)
                                                                               (VI, TH)             Breach of dynamic limit within 5‐min leads to
                                                                                                      a 5‐min halt.
Montreal Exchange                  MX      Montreal         Canada             Discretionary   None Set on a monthly basis after collaborating with
                                                                                 (TH)                 clearing corporation
Bolsa de Valores de El Salvador    BVES    San Salvador     El Salvador        None            None
Bolsa Nacional de Valores          BNV     Guatemala City Guatemala            None            None
Haitian Stock Exchange             HSE     Port‐au‐Prince   Haiti              None            None
Bolsa Centroamericana de Valores   BCV     Tegucialpa       Honduras           None            None
Jamaica Stock Exchange             JSE     Kingston         Jamaica            ±15% (TH)       None Market‐wide temporary suspension
                                                                               ±30% (PL)       None Stock‐specific
Bolsa Mexicana de Valores          BMV     Mexico City      Mexico             ±15% (TH)       None Halting is discretionary.
Trinidad and Tobago Stock Exchange TTSE    Port of Spain    Trinidad and Tobago ±15% (TH)      None Market‐wide temporary suspension
                                                                                ±30% (PL)      ±10% Stock‐specific. Order rejection in place
                                                                                                      for variations beyond 10%.
NASDAQ                             NASDAQ New York City USA                    7%, 13%, 20%    None Market‐wide trading halts occur if S&P 500 drops
                                                                                                      by 7% (Level 1), 13% (Level 2),
                                                                                                      and 20% (Level 3)
                                                                               (TH)                 Level 1 and Level 2 are temporary halts, whereas
                                                                                                      Level 3 results in suspension for the day's
                                                                                                      remaining hours.
                                                                                                    Level 1 and Level 2 halts are for 15 min if they
                                                                                                      occur before 3.25 PM.
                                                                               LULD Breaker         Price Band = (Reference Price) +/− ((Reference Price) x
                                                                                                      (Percentage Parameter))
                                                                                                    Up/Down Bands come from multiplying Reference Price
                                                                                                      by % Parameter and then adding or subtracting that
                                                                                                      value from RP.
                                                                                                    The resulting values are then rounded to the nearest penny.
                                                                                                                                                                            SIFAT AND MOHAMAD

TABLE 1    (Continued)

Panel C: North America
New York Stock Exchange          NYSE     New York City USA                 7%, 13%, 20%      None Market‐wide trading halts occur if S&P 500 drops by
                                                                                                     7% (Level 1), 13% (Level 2), and 20% (Level 3)
                                                                            (TH)                   Level 1 and Level 2 are temporary halts, whereas Level 3
                                                                                                                                                                               SIFAT AND MOHAMAD

                                                                                                     results in suspension for the day's remaining hours.
                                                                                                   Level 1 and Level 2 halts are for 15 min if they occur
                                                                                                     before 3.25 PM.
                                                                            LULD Breaker           Price Band = (Reference Price) +/− ((Reference Price) x
                                                                                                     (Percentage Parameter))
                                                                                                   Up/Down Bands come from multiplying Reference Price by %
                                                                                                     Parameter and then adding or subtracting that value from RP.
                                                                                                   The resulting values are then rounded to the nearest penny.
                                                                                                   Level 1 and Level 2 halts are for 15 min if they occur before 3.25 PM.
Panel D: South America

Buenos Aires Stock Exchange     BCBA      Buenos Aires     Argentina   ±10%, ±15% (TH)            None            Market‐wide trading halts.
Bolsa Boliviana de Valores      BVB       La Paz           Bolivia     Undisclosed (TH)           None
BM&F Bovespa                    BOVESPA   Sao Paulo        Brazil      Undisclosed (VI, TH)       Undisclosed     Market‐wide trading halt occurs at 3 levels:
                                                                                                                    10%, 15%, and 20%. Level 1 and 2 result in
                                                                                                                    30 and 60‐min halts.
                                                                                                                  Level 3 shuts down the market for the rest of the
                                                                                                                    day. Dynamic volatility interruptions last 2 min.
Rio de Janeiro Stock Exchange   BVRJ      Rio de Janeiro   Brazil      Undisclosed (VI, TH)       Undisclosed     Market‐wide trading halt occurs at 3 levels: 10%, 15%,
                                                                                                                    and 20%. Level 1 and 2 result in 30 and 60‐min halts.
                                                                                                                  Level 3 shuts down the market for the rest of the day.
                                                                                                                    Dynamic volatility interruptions last 2 min.
Bolsa Comercio de Santiago      SSE       Santiago         Chile       Discretionary (TH)         None
Bolsa de Valores de Colombia    BVC       Bogota           Colombia    ±10%; ±15% (TH)            None            Market‐wide trading halt at ±10% for 30 min. Second
                                                                                                                    level leads to day‐long suspension
                                                                       ±6.5%, ±7.5%, ±10% (TH)    None            2.5‐min stock‐specific trading halts.
Bolsa de Valores de Lima        XLIM      Lima             Peru        ±7%, ±10% (TH)             None            Market‐wide trading halts based on BVL index.
                                                                       ±15% (PL, VI)              None            Single Stock circuit breaker for equities. ELEX trading
                                                                                                                    platform rejects orders if price volatility is severe.


TABLE 1 (Continued)

Panel D: South America
Bolsa de Valores de Montevideo   BVL       Montevideo        Uruguay     None                        None
Bolsa de Valores de Caracas      BVC       Caracas           Venezuela   None                        None
Panel E: Europe

Tirana Stock Exchange              XTIR   Tirana        Albania
Wiener Borse                       XWBO   Vienna        Austria           Undisclosed (VI)   Undisclosed Volatility interruption is triggered upon breaching an
                                                                                                           undisclosed price band (assumed 2–4%).
                                                                                                         Call auction ensues, lasting 2–5 min.
Belarusian Currency and Stock      BCSE   Minsk         Belarus
Euronext Brussels                  XBRU   Brussels      Belgium           ±10% (VI, TH)      ±5%            ±6% static and ± 3% dynamic limit for BEL20 stocks.
Sarajevo Stock Exchange            XSSE   Sarajevo      Bosnia &          ±20%; ±50% (PL)    ±3%            ST1 segment, comprising 30 most liquid shares, is
                                                          Herzegovina                                         subject to ±20% static limit
                                                                                                            ST2 segment, comprising all shares sans ST1, is subject
                                                                                                              to ±50% static limit
                                                                                                            Both ST1 and ST2 are subject to ±3% dynamic limit,
                                                                                                              which triggers a 15‐min volatility interruption
Bulgarian Stock Exchange           XBUL   Sofia         Bulgaria          ±10% (PL)          ±5%            Premium equities as designated by BSE, non‐leveraged
                                                                                                              ETFs, and special purpose vehicles.
                                                                          ±20% (PL)          ±10%           Standard equities as designated by BSE, compensatory
                                                                                                              instruments, and leveraged ETFs.
                                                                          ±5% (PL)           ±2.5%          Bonds
                                                                          ±30% (PL)          ±15%           BaSE market and shares traded at scheduled auctions.
                                                                                                              Dynamic limit does not apply to the latter.
Zagreb Stock Exchange              XZAG   Zagreb        Croatia           ±10% (PL)          None           Applies to shares which trade on 75% trading days with
                                                                                                              average daily turnover > HRK 100,000.
                                                                          ±15% (PL)          None           Applies to shares which trade on 50% trading days with
                                                                                                              average daily turnover > HRK 50,000.
                                                                          ±25% (PL)          None           Remaining shares.
Prague Stock Exchange              XPRA   Prague        Czech Republic    Variable (VI)      Variable       If the midpoint of the allowable spread deviates by more
                                                                                                               than 20% from the midpoint at the start of the open
                                                                                                               phase and does not
                                                                                                            Return to within spread
TABLE 1 (Continued)

Panel E: Europe
                                                                                                       The permissible spread is extended by 10% post‐resumption,
                                                                                                         with provision for upto ±50%.
                                                                                                                                                                              SIFAT AND MOHAMAD

Copenhagen Stock Exchange           XCSE    Coepnhagen Denmark       ±15% (PL, VI)       ±5%           For OMXC20 stocks, static and dynamic limits are
                                                                                                         ±10% and ± 3%
                                                                                                       Static and dynamic limits lead to 3 and 1‐min suspensions,
                                                                                                         followed by discrete call auctions.
Tallinn Stock Exchange              XTAL    Tallinn      Estonia     ±15% (PL)           None
Helsinki Stock Exchange             XHEL    Helsinki     Finland     ±15% (PL, VI)       ±5%           For OMXC20 stocks, static and dynamic limits are
                                                                                                         ±10% and ± 3%
                                                                                                       Static and dynamic limits lead to 3 and 1‐min suspensions,
                                                                                                         followed by discrete call auctions.
Euronext Paris                      XPAR    Paris        France      ±10% (TH, VI)       ±2%           5‐min cooling period for dynamic limit hit.
Georgian Stock Exchange
Deutsche Borse Group                XETR    Frankfurt    Germany     Undisclosed (VI)    Undisclosed Volatility interruption auction lasts 2 min.
Eurex Exchange                      XEUR    Frankfurt    Germany     Undisclosed (VI)    Undisclosed Opening auction, volatility interruption auction,
                                                                                                      and closing auctions are subject to freezes.
Athens Stock Exchange               ATHEX Athens         Greece      ±10%; ±18% (PL)     None          Does not apply to first 3 days of IPO stocks.
                                                                                                       For all equities on FTSE/ASE 20 Index: 10% up/down
                                                                                                         for 15 min and no limit thereafter.
Budapest Stock Exchange             BUX     Budapest     Hungary     ±10%, ±15% (TH,     ±5%           Trading pauses last between 2 to 15 min. BSE halts an
                                                                      VI)                                instrument once only in a day.
Nordic Exchange of Iceland          XICE    Reyjkjavik   Iceland     Variable (TH, VI)   Variable      OMXC20, OMXH25, and OMXS30 are subject to ±10% static
                                                                                                        and ± 2% dynamic limits
                                                                                                       Dynamic ±3% for OMXI15, and ± 5% limit for investment
                                                                                                        funds, ETFs, First North and International OMXS shares.
                                                                                                       ±15% static limit for First North and International OMXS shares.
                                                                                                       ±10% dynamic and ± 20% static limit for penny stocks
                                                                                                        and illiquid shares.
Irish Stock Exchange                XDUB    Dublin       Ireland     Variable (VI)       ±2%           Volatility interruptions can be prolonged in stressful
                                                                                                         market circumstances.
Borsa Italiana                      XMIL    Milan        Italy       ±10% (PL)           Variable      Price band depends on market segment and industry
Riga Stock Exchange                 XRIS    Riga         Latvia      ±15% (PL)           None
Nasdaq OMX Vilnius Stock Exchange   VILSE   Vilnius      Lithuania   ±15% (PL)           None


TABLE 1 (Continued)

Panel E: Europe
Luxembourg Stock Exchange       LUXXX Luxembourg Luxembourg       ±10% (VI, PL)       ±5%           ±6% static and ± 3% dynamic limit for BEL20 stocks.
Macedonian Stock Exchange       XMAE   Skopje       Macedonia     ±10% (PL)           None
Borza Malta                     XMAL   Valletta     Malta         Undisclosed (PL)    Undisclosed In effect since regulatory changes in 2014.
Moldova Stock Exchange          MSE    Chisinau     Moldova       ±25% (PL)           None
Montenegro Stock Exchange       MSE    Podgorica    Montenegro    ±10% (PL)           None
New Securities Stock Exchange   NEX    Podgorica    Montenegro    ±10% (PL)           None
Euronext Amsterdam              XAMS   Amsterdam    Netherlands   ±10% (VI, TH)       ±5%           Reference price is re‐adjusted only after an incoming
                                                                                                      order has been matched against orders in the
                                                                                                      Central Order Book.
Oslo Stock Exchange             XOSL   Oslo         Norway        ±15% (VI, TH)       ±5%           OBX shares only. Other shares are subject to ±25% static
                                                                                                     and ± 15% dynamic limit. Implements matching halts
                                                                                                     and special observations.
Warsaw Stock Exchange           XWAR   Warsaw       Poland        Undisclosed (PL)    Undisclosed
Euronext Lisbon                 XLIS   Lisbon       Portugal      ±10% (VI, TH)       ±5%           Reference price is re‐adjusted only after an incoming order
                                                                                                      has been matched against orders in the Central Order Book.
Bucharest Stock Exchange        XBSE   Bucharest    Romania       ±15% (PL)           None
Moscow Exchange                 MISX   Moscow       Russia        ±20% (TH, VI)       None          Stock‐specific. Call auctions can be hold intraday if
                                                                                                      limit is breached.
Belgrade Stock Exchange         XBEL   Belgrade     Serbia        Undisclosed (PL)    Undisclosed Implemented from December 2016.
Bratislava Stock Exchange       SKSM   Bratislava   Slovakia      ±10% (PL)           None
Ljubljana Stock Exchange               Ljubljana    Slovenia      ±10% (PL)           None          Prime market (blue chip) fluctuations are tolerated till ±30%.
Bolsa Valores de Barcelona      BMEX   Barcelona    Spain         Variable (VI, PL)   Variable      Volatility interruption in place if either limit is breached. Call
                                                                                                      auction lasts 5 min with 30‐s random end.
                                                                                                    Standardized categories for possible static ranges are ±4%, ±5%,
                                                                                                      ±6%, ±7%, and ± 8%.
                                                                                                    Standardized categories for possible dynamic ranges are 1%,
                                                                                                      1.5%, 2%, 2.5%, 3%, 3.5%, 4% and 8%.
Bolsa de Madrid                 BMEX   Madrid       Spain         Variable (VI, PL)   Variable      Volatility interruption in place if either limit is breached. Call
                                                                                                      auction lasts 5 min with 30‐s random end.
                                                                                                    Standardized categories for possible static ranges are ±4%, ±5%,
                                                                                                      ±6%, ±7%, and ± 8%.
                                                                                                    Standardized categories for possible dynamic ranges are 1%, 1.5%,
                                                                                                      2%, 2.5%, 3%, 3.5%, 4% and 8%.

                                                                                                                                                                            SIFAT AND MOHAMAD
TABLE 1       (Continued)

 Panel E: Europe
 Stockholm Stock Exchange                     XSTO       Stockholm       Sweden                   ±15% (VI, PL)          ±5%              OMXS30 stocks are subject to ±10% static and ± 3% dynamic
                                                                                                                                          Static and dynamic limits lead to 3 and 1‐min
                                                                                                                                                                                                                         SIFAT AND MOHAMAD

                                                                                                                                            suspensions, followed by discrete call auctions.
 SIX Swiss Exchange                           XSWS       Zurich          Switzerland              None (VI, TH)          ±1.5%,           No MWCB. Large and mid‐small cap stocks face 5
                                                                                                                          ±2.5%            and 15‐min trading halts for breaching
                                                                                                                                           dynamic limit.
 Ukrainian Exchange                           XUAX       Kiev            Ukraine                  None                   None
 London Stock Exchange                        XLON       London          UK                       Variable (VI, TH)      Variable         Ranges from ±5% to ±25% depending on market
                                                                                                                                            segment, liquidity, and size of the asset.
                                                                                                                                          Breaching either limit triggers an Automatic Execution
                                                                                                                                            Suspension Period (AESP).
 Aquis Exchange                               AQXE       London          Pan‐Europe               Variable (VI, TH,      Variable         Collars are set based on market segments.
                                                                                                                                          Currencies supported include GBP, EUR, DKK, NOK,
                                                                                                                                           SEK, and CHF.
 BATS Chi‐X Europe                            BXE        London          Pan‐Europe               ±10% (VI, TH, PL) ±5%                   Currencies of 15 participating markets are supported.

Note. This table chronicles the various circuit breakers employed by stock exchanges around the world. The information is procured from a variety of sources including public domain information, voluntary disclosure
by exchanges, fact books, and correspondence with exchange personnel. Participants of the LULD breaker system include BATS Exchange, BATS Y‐Exchange, Chicago Board Options Exchange Incorporated (CBOE),
Chicago Stock Exchange, EDGA Exchange, EDGX Exchange, NASDAQ OMX BX, NASDAQ, National Stock Exchange, NYSE, NYSE Amex, and NYSE ARCA. For the LULD breaker scheme, please refer to Section 3 in
main body of this paper. The acronyms PL, TH, and VI correspond to price limits, trading halts, and volatility interruptions.
16                                                                                                                SIFAT AND MOHAMAD

which in turn will increase liquidity and participation                 orders aggravate an already stressed order‐book flooded
around equilibrium price upon resumption (Copeland &                    with uninformed orders. In this way, trading halts can
Galai, 1983). Moreover, circuit breakers are hoped to edu-              decrease transitory volatility. Moreover, an order‐driven
cate the market when channels of information transmis-                  market may boast higher liquidity with a trading halt
sion (i.e., quotes) are absent (Greenwald & Stein, 1988)                mechanism. In these markets, traders offering standing
and in so doing promote price discovery and decrease                    limit order suffuse liquidity. In normal circumstances, if
information asymmetry.                                                  price drops fast, a trader with standing limit orders will
     Both price limits and trading halts brake the price                incur loss as the price continues to drop. However, a halt
change mechanism. Whether this slowing down is benefi-                  changes the mechanism from continuous to single‐price
cial depends on the source of volatility. If the source is              auction upon resumption, when all orders are executed
newly available fundamental information, the halt is only               at the same settlement price. If a large selling order
delaying the inevitable. Trade stoppage conveys no infor-               imbalance exists, all limit order buyers will receive it at
mation on price expectations and could fuel further panic               the low clearing price. This protects the limit order buyers
speculation resulting in greater transitory volatility when             and encourages them to provide more liquidity in calmer
trade resumes. However, halt of trade before noise traders              market circumstances.
execute panic‐driven orders would reduce transitory vola-                   Contrarily, price limits and halts can increase transi-
tility and hence be desirable.1 Similarly, if excessive noise           tory volatility if traders are afraid that trading will stop
trades cause an order imbalance, halts could benefit the                before they can submit order, leading to a hastening of
market by protecting noise traders from losses stemming                 order placement to increase the likelihood of execution.
from operating in a market with suboptimal depth. More-                 This triggers greater volatility, and rational traders recoil
over, this allows market makers a chance to enter the                   from trading amid fast‐changing quotes. This phenome-
market and provide liquidity (Kodres & O'Brien, 1994).                  non is known as the magnet effect, coined by
In this scenario, Greenwald and Stein's (1991) theoretical              Subrahmanyam (1994), who expanded on Lehmann's
model shows informed traders' transactional risk drops                  (1989) predictions and later theoretically demonstrated
when prices move fast due to uninformed trades as                       this effect. He later postulated that rule‐based halts are
value‐seeking traders cautiously retreat since they are                 more susceptible to magnet effect due to higher
unsure at what price their trades will execute. Conse-                  predictability compared with discretion‐based halts
quently, market participants have a greater incentive to                (Subrahmanyam, 1997).
be more informed before opening or closing a position.                      There is a possibility that informed traders may devote
     Trading halts can also give brokers more time to col-              less time to monitoring the market if they know that they
lect margins. Brennan (1986) argued circuit breakers                    will be notified if trade is halted. Therefore, market liquid-
can act as a partial substitute for margin requirements if              ity may worsen in between trade halts, exacerbating
market participants are unsure about the eventual equi-                 transitory volatility, and leading—eventually—to more
librium prices during the time out period. For example,                 trade halts. For countries with multiple exchanges, a cir-
a commodity trader posting 8% margin will lose all if                   cuit breaker trigger in one market may cause perils in
price goes down by 20%. Should an 8% fall happen imme-                  other exchanges. If only one market's trade stops, order
diately, though the trader should lose his whole position,              flow diverts to the remaining open market(s). Thus,
in practice, he only loses the 8% margin, and the broker                solitary circuit breaker regimes may be counterproductive.
stands to collect additional 12% later. However, with a                 Hence, many early researchers suggested coordination of
circuit breaker of 10% in place, and neither the trader                 regulation among exchanges to facilitate meeting higher
nor the broker knowing the eventual price trajectory to                 demand for liquidity in multiple markets instead of one
be 20% lower, the trader has an opportunity to attend to                (Lauterbach & Ben‐Zion, 1993).
the first margin call voluntarily. This allows the broker                   Through a sequential microstructure trade model,
multiple opportunities to collect margin when circuit                   Glosten and Milgrom (1985) demonstrate that unin-
breakers are in place. Failure to meet the margin call                  formed traders acquire information by observing the
gives brokers more time to trade to stop the loss. More-                trade process. Thus, trade contains an informational
over, when a security or the market is in duress, stop‐loss             content, which is learnable only when trade is active.
                                                                        This leads to opponents arguing that absence of trade
                                                                        delays price discovery by postponing informed and unin-
 The term “noise” comes from Black's (1986) definition: “Noise in the
                                                                        formed agents' reactions to new information (Fama,
sense of a large number of small events is often a cause factor much
more powerful than a small number of large events can be.” Financial
                                                                        1989). Moreover, if large price moves are induced by
economics literature regards noise a result of sudden liquidity based   heavy one‐sided order flow (i.e., order imbalance) and
and frequently inelastic demand on the part of a market participant.    trigger a halt, informed traders are forced to temporize
SIFAT AND MOHAMAD                                                                                                       17

partial or full trading strategies, and whatever volatility    groundwork for later economists to build a theoretical
was due to take place is splattered over subsequent trad-      framework for circuit breakers.
ing sessions, typically with reduced liquidity (Chordia,
Roll, & Subrahmanyam, 2002; Seasholes & Wu, 2007).
                                                               5.1 | Pioneer models
Regarding this, Roll (1989) remarks: “… most investors
would see little difference between a market that went         First, Greenwald and Stein's (1991) model operates under
down 20 percent in one day and a market that hit a 5 per-      the assumption that circuit breakers strive to re‐establish
cent down limit four days in a row. Indeed, the former         the information flow when information transmission is
might very well be preferable.”                                interrupted somehow. In this model, traders are disin-
    To sum up, opponents' view on circuit breakers can be      clined to participate when heightened uncertainty sur-
condensed into four points: volatility spillover across sub-   rounds true value of a security. Moreover, a random
sequent trading session, trading interference, delayed         and exogenous value was assigned to value‐seeking inves-
information transmission, and gravitational pull or mag-       tors who respond to a volume shock from noise traders.
net effect hypothesis. After the flash crash of 2010, fresh    This is partially attributable to the uncertainty surround-
questions surfaced as to whether the trading halt devices      ing the number of traders engaged in market surveillance
designed in rather simpler trading environments three          at that point and magnifies the transactional risk which
decades ago are still relevant in today's high frequency       makes traders withdraw from the market whenever unin-
zeitgeist and, if not, to what extent should they be tai-      formed traders cause quick price movements. The effect
lored, or should the regulators go back to the drawing         of circuit breaker on distribution of number of first
board and start anew. The computerization of trading           value‐seeking responders is missing from this model.
and liquidity provision, coupled with trade decentraliza-      Nonetheless, the authors' conclusion that the value‐seek-
tion, has led to a distinct rise in volume and volatility in   ing informed traders benefit from a superior understand-
the new climate (Brogaard, 2011). Regulators and mar-          ing of what is transpiring in the market with active
kets in the United States coordinated on a large‐scale         trading halts provided fodder for future theoretical
pilot project after the crash to investigate the efficacy of   models.
the classical circuit breaker regime versus recalibrated           Kodres and O'Brien's (1994) model promotes Pareto‐
narrow band of single stock price limits. Concurrently,        optimal risk sharing by decreasing unanticipated large
European regulators took steps to move away from the           price swings and suggests that limits may be effective in
endemic discrete circuit breaker regimes towards a uni-        preventing liquidity providers who don't continuously
fied framework to allow circuit breakers to operate across     survey the market incur large losses. Slezak's (1994) theo-
venues. To what extent this will succeed remains to be         retical framework supposes trade cessation to delay dis-
seen because exchanges have a vested interest in setting       semination of private information. Thus, the model
individual rules in a competitive environment to attract       shows that trading halts increase risk premia and volatil-
order flow. Nonetheless, Biais and Woolley (2011) posit        ity by restricting public flow of information. Chowdhry
that without tailor‐made cross‐platform streamlining           and Nanda's (1998) model proposes circuit breakers as a
across markets, circuit breakers cannot be effective any-      market stabilizing instrument by eliminating potentially
more since in modern age of high‐frequency trading arbi-       troublemaking prices. Their model argues that price
trage occurs across markets and suspending trade in the        limits coupled with flexible margin requirement can con-
underlying spot while allowing the derivative trade can        siderably stabilize the market.
be dangerous.                                                      Chou, Lin, and Yu's (2003) model shows that price
                                                               limits can alleviate default risk and lower the effective
                                                               margin requirement. This model, an extension of
5 | THEORETICAL B ACKGROUND                                    Brennan's (1986), supports the Brady Commission's
                                                               suggestion that coordination of circuit breakers across
Barring Brennan's (1986) conjecture on using price limits      markets will facilitate spot and futures price limits to be
as a substitute to margin requirements in the futures mar-     partial substitutes for each other and aid contract fulfil-
kets to confirm contract compliance, prior to the Brady        ment. For speculative markets, Westerhoff's (2003) model
Commission Report, theoretical discourse on circuit brea-      finds price limits to promote social welfare and placate
kers was absent from academia. The earliest discussants,       volatility. It should be pointed out here that among the
Kyle (1988), Greenwald and Stein (1988), Lehmann               earliest discussants, Fama (1989), Kyle (1988), Lehmann
(1989), Fama (1989), and Moser (1990), provide theoreti-       (1989), Telser (1989), and Moser (1990) do not formulate
cal discussions on why circuit breakers can be reasoned        a model to support their arguments. Their primary
to be a good or bad idea. These discussions laid the           concerns with circuit breakers are—as mentioned
18                                                                                                     SIFAT AND MOHAMAD

earlier—regarding volatility spillover, price discovery        trade interruption parries resolution of information
delay, restricted access to liquidity, and trading             uncertainty and levies undue risk on both informed and
interference.                                                  uninformed investors. In experimental simulation
                                                               settings, Ackert, Church, and Jayaraman (2001) find that
                                                               traders accelerate their orders when faced with imminent
5.2 | Discrete trading
                                                               trade barrier—implying magnet effect.
Although the theoretical discussions so far rely on simple,
continuous trading‐based circuit breakers, Madhavan
(1992) proposes a switch to call auctions in times of          5.4 | Agent‐modelling approach
market duress. His model shows that continuous markets         Using a market model with heterogeneously informed
may not be viable or desirable when information asym-          agents, Anshuman and Subrahmanyam (1999) show that
metry is high. Hence, adopting a pure trading halt can         circuit breakers reduce the bid‐ask spreads as informed
worsen the original problem because once trading is            traders need to procure less information, though this
halted, resuming continuous trade with re‐established          comes at a cost of diminished price efficiency. Therefore,
information flow may be difficult or even impossible.          the authors conclude the optimal price limit to be the
The model contends periodic trading mechanisms to be           result of a trade‐off between liquidity and informational
more robust in redressing information asymmetry and            efficiency. Spiegel and Subrahmanyam (2000) propose
hence suggests a temporary switch to a call auction to         an adverse selection‐based model and contend that a
avert market failure. He further argues that a batch mar-      trade halt trigger for any stock poses large information
ket is better than a trade halt because the discrete trading   asymmetry risk for connected stocks, for example, same
system can stay active when dealers refuse to play market      industry or correlated stocks. Kim and Sweeney's (2002)
makers and thereby provide information signals that            model shows that informed traders may be reluctant to
allow resumption of continuous trading. The model also         “show their hands” when price nears the limit but
proposes a bid‐spread higher than a preset critical level      remains distant from equilibrium as the opportunity cost
—set stochastically based on recent volume and spreads         would be too high. Thus, circuit breakers may protract an
—to trigger the switch. Madhavan remarks that this             existing information asymmetry.
triggering mechanism should outperform the popular
one (at the time) because big price moves may be due
to change in firm fundamentals. Later, using a Bayesian        5.5 | Price abuse and manipulation
model, Harel and Harpaz (2006) predict that tightened          Working on a manipulation angle, Edelen and Gervais
limit regulations would impede the price discovery             (2003) extend assumptions of agency theory to circuit
process and diminish social welfare.                           breakers and reason that trading halts can aid principals
                                                               (exchanges, regulators) monitor and prevent abusive pric-
5.3 | Magnet effect                                            ing by agents (market specialists, operators). Kim and
                                                               Park's (2010) model makes similar claims. Their triperiod
Focusing on trading strategies of informed traders and         model of private and public information arrivals shows
liquidity providers, Subrahmanyam (1994) proposes a            that when unanticipated private information arrives,
model suggesting the possibility of a magnet effect, first     circuit breakers minimize profit potentials of large,
discussed by Lehmann (1989). In this model, rule‐based         informed investors who would otherwise gain by price
halts incentivize uninformed traders to accelerate their       manipulation, often through disseminating false informa-
trades in a concentrated way, leading to higher ex ante        tion beforehand. This restraint on price manipulation,
volatility as the price moves closer to the limit, though      however, sacrifices pricing efficiency.
not necessarily due to depressed liquidity. In a follow‐up
paper, Subrahmanyam (1995) shows that discretion‐
based halts outperform rule‐based halts in easing the          6 | EMPIRICAL WORKS
magnet effect. In a later paper, Subrahmanyam (1997)
shows that when facing a realistic likelihood of a trig-       Many studies have examined circuit breakers from a wide
ger‐hit, informed traders postpone their orders to prevent     array of angles. In this section, we categorize the studies
a halt. Because this dampens liquidity, the model suggests     according to the four major points of contention between
introduction of discretionary randomness in the trigger-       proponents and opponents. The discussions in Subsec-
ing mechanism to encourage higher liquidity. In a round-       tions 6.1 to 6.4 are complemented by Table 2, which
about way, this phenomenon was shown by Slezak (1994)          depict summarized findings of the major empirical works
through a multiperiod market closure model, whereby            in this field. Interestingly, from the tables, some
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