The correct calibration of circuit breakers topped the list as the most relevant practical question relating to market safeguards, followed by an assessment of their effectiveness, according to a new study – Circuit breakers and other market safeguards – from the World Federation of Exchanges (WFE), the global industry group for exchanges and central counterparty clearing houses (CCPs).
The paper is the first of a two part series that examines and analyses the kind of circuit breakers and other safeguards that are currently most prevalent among exchanges and how they were used during the recent Covid-19 related events.
The analysis focuses on the equity markets, covering both cash equities and equity derivatives, and reflects exchanges’ views on the topic over the period from June to November 2020, when the survey was conducted.
Circuit breakers, which are more prevalent in cash markets, are mechanisms that temporarily halt continuous trading or delay an auction as and when excessive volatility disrupts the price discovery function of exchanges. They can be used jointly with price limits.
They have been contentious among certain market participants who believe that stopping activity is disruptive and can keep volatility artificially high because it causes orders to build at the limit level and decrease liquidity.
Circuit breakers re-entered the policy debate last spring when the pandemic hit, triggering significant volatility. This led to trading halts in numerous markets worldwide and caused around a third of exchanges to review their calibration.
Analysts expect stock markets to continue experiencing temperamental behaviour throughout 2021.
The WFE paper notes that none of the respondents saw coordination of circuit breakers across venues or jurisdictions as a priority.
‘The events of the last year have led to a renewed interest in the usefulness and benefits of circuit breakers and in their design,” said Nandini Sukumar, Chief Executive Officer of the WFE.
She added, “Exchanges and other market infrastructures are committed to ensuring the resilience of markets and believe that analysis, data and innovation lead to optimal mechanisms through which volatility can be managed. This paper is designed to be both educational and a base for further thought.’’
Pedro Gurrola-Perez, Head of Research at the WFE said, ‘In line with WFE’s mandate of educating stakeholders on how exchanges and CCPs serve the economy, this paper contributes to the wider understanding of the tools that exchanges use as safeguards to maintain orderly markets and of the design choices involved.”
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