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Circuit Breakers and Market Quality in High Frequency Markets

Author

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  • Roland Gillet

    (PRISM Sorbonne - Pôle de recherche interdisciplinaire en sciences du management - UP1 - Université Paris 1 Panthéon-Sorbonne, UP1 EMS - Université Paris 1 Panthéon-Sorbonne - École de Management de la Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne, ULB - Solvay Brussels School of Economics and Management [Brussels] - ULB - Université libre de Bruxelles)

  • Stéphanie Ligot

    (UP1 FCPS - Université Paris 1 Panthéon-Sorbonne - Formation continue Panthéon Sorbonne - UP1 - Université Paris 1 Panthéon-Sorbonne)

  • Iryna Veryzhenko

    (CNAM - Conservatoire National des Arts et Métiers [CNAM], LIRSA - Laboratoire interdisciplinaire de recherche en sciences de l'action - CNAM - Conservatoire National des Arts et Métiers [CNAM])

Abstract

This paper examines the effectiveness of short-term circuit breakers as a financial markets' regulation tool. We assess their ability to limit large price swings and curb panic trading by observing how the behavior of market participants (pure-HFT, mix-HFT, and non-HFT) is altered. We essentially track their liquidity provision and consumption over relatively calm periods and during specific turbulent periods that lead to trading halts. Our sample covers High-Frequency data on trades and orders (all messages) on the most liquid stocks included in the SBF120 French Index for the period ranging from January 4, 2016 to December 28, 2016. We reveal that non-HFTs and mix-HFTs start playing the role of liquidity suppliers and effectively use trading halts to dampen price movements. These protected traders' categories initiate a trend reversal while surprisingly, HFTs stop acting as market-makers and post more aggressive trades in the trend direction, which makes market recovery more difficult. Overall, our findings suggest that a circuit breaker may be insufficient to deter all traders from following a trend and hence, to prevent a potential market crash. Financial tools could be developed to manage the order flow toxicity in real-time.

Suggested Citation

  • Roland Gillet & Stéphanie Ligot & Iryna Veryzhenko, 2024. "Circuit Breakers and Market Quality in High Frequency Markets," Working Papers hal-04440641, HAL.
    • Handle: RePEc:hal:wpaper:hal-04440641
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