The European Securities and Markets Regulator (ESMA), the EU’s securities markets regulator published a study on the market impacts of circuit breakers. Based on Morningstar real-time data ESMA has created a unique database of circuit breakers triggered between 1 April 2016 and 31 December 2016 on a sample of 10,000 financial instruments traded on EU trading venues, to analyze the impact they have on the market.
Sudden and drastic price swings in financial markets can be a source of market instability and are a concern for market participants, supervisors and regulators. Circuit breakers (CBs) are key instruments for trading venues to interrupt excessive price movements. Using the unique database of CBs, ESMA researchers analyze market impacts of CBs. They find that price volatility is significantly lower after the CB, while bid-ask spreads widen and the price discovery process is not negatively affected by the CB.
ESMA also examined the cross-venue character of the database to contribute to the discussion on cross-venue CB coordination. Cross-listed instruments traded in continuous trading on satellite markets during a CB on the reference market experience a “hidden CB”. Despite being in continuous trading, trading activity on the satellite market decreases drastically and liquidity dries up as investors refrain from trading waiting for the reference market to set the CB auction price.