Keywords

market liquidity, trading halts, circuit breakers

Abstract

Liquidity is an important feature of well-functioning capital markets. While many market frictions exist that constrain liquidity, none are as dramatic as trading halts when trading is suspended altogether. Trading halts became a common feature of US securities markets in the aftermath of Black Monday (October 19, 1987). The hope of regulators was that system-wide trading halts, so-called market circuit breakers, would decrease the likelihood of dramatic sell-offs by allowing markets to cool off. Regulators further argued that security-specific trading halts implemented in advance of a material news release could also reduce volatility and help level the playing field between investors. To date, however, there is very little empirical evidence that trading halts are meeting these objectives. This lack of evidence is concerning given that the frequency of trading halts has been steadily increasing over time.

Original Publication Citation

Drake, Michael. (2023), Discussion of "Why Can't I Trade? Exchange Discretion in Calling Halts". Contemp Account Res, 40: 356-405. https://doi.org/10.1111/1911-3846.12813