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Keynes Fund

Summary of Project Results

The key findings of our study into the efficacy of single stock circuit breakers (SSCBs) on the LSE is that these mechanisms play an important role in preventing the transmission of market instability across securities.

We find that SSCBs help prevent the transmission of poor market quality in a volatile stock that has a undergone significant price movements and is removed from trading, to other stocks that continue to trade on the electronic limit orderbook. We estimate that the occurrence of a single stock circuit breaker leads to a statistically significant reduction in volatility and bid-ask spreads of those stocks that remain in continuous trading on the limit order book. Placebo tests using the same method show no significant changes in market quality for stocks with high absolute returns but that are not removed from continuous trading.

Our evidence that circuit breakers play this role suggests that they help prevent contagion of poor market quality equity markets. This suggests they may help limit the occurrence of low liquidity, high volatility equilibria in such markets relative to “good” equilibria characterised by low volatility and low trading costs.

It was our initial intention was to focus on the effect of circuit breakers themselves on the suspended security, however the focus on the spillovers of market quality have greater relevance for policy makers interested in implementing mechanisms to promote market-wide quality and stability. Our data also did not yield a suitable solution to the identification challenge that has prevented this from being effectively achieved in past studies.

Research Output

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

Circuit Breakers on the London Stock Exchange: Do they improve subsequent market quality?, James Brugler and Oliver Linton, 2014


This paper uses proprietary data to evaluate the efficacy of single-stock circuit breakers on the London Stock Exchange during July and August 2011. We exploit exogenous variation in the length of the uncrossing periods that follow a trading suspension to estimate the effect of auction length on market quality, measured by volume of trades, frequency of trading and the change in realised variance of returns. We also estimate the effect of a trading suspension in one FTSE-100 stock on the volume of trades, trading frequency and the change in realised variance of returns for other FTSE-100 stocks in the same industrial sector as the event stock and in other sectors. We find that auction length has a significant detrimental effect on market quality for the suspended security when returns are negative but no discernible effect when returns are positive. We also find that trading suspensions help to ameliorate the spread of market microstructure noise and price inefficiency across securities during falling markets but the reverse is true during rising markets. Although trading suspensions may not improve the trading process within a particular security, they do play an important role preventing the spread of poor market quality across securities in falling markets and therefore can be effective tools for promoting market-wide stability.

Project Information

Project Code: JHLD
Project Investigators
  • Professor Oliver Linton
Research Round
First Round (November 2012)

Project Investigators

Professor Oliver Linton is the Professor of Political Economy in the Faculty of Economics and a Fellow of Trinity College, University of Cambridge. His research is focussed on nonparametric and semiparametric methods with an interest in Financial Econometrics.