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How effective are trading pauses?

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  • Hautsch, Nikolaus
  • Horvath, Akos

Abstract

Exploiting NASDAQ order book data and difference-in-differences methodology, we identify the distinct effects of trading pause mechanisms introduced on U.S. stock exchanges after May 2010. We show that the mere existence of such a regulation constitutes a safeguard which makes market participants behave differently in anticipation of a pause. Pauses tend to break local price trends, make liquidity suppliers revise positions, and enhance price discovery. In contrast, pauses do not have a "cool off" effect on markets, but rather accelerate volatility and bid-ask spreads. This implies a regulatory trade-off between the protective role of trading pauses and their adverse effects on market quality.

Suggested Citation

  • Hautsch, Nikolaus & Horvath, Akos, 2017. "How effective are trading pauses?," CFS Working Paper Series 571, Center for Financial Studies (CFS).
    • Handle: RePEc:zbw:cfswop:571
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    3. Joost Bats & William Greif & Daniel Kapp, 2021. "The rise in the cross-sectoral dispersion of earnings expectations during COVID-19," Working Papers 724, DNB.
    4. Lin, Hai & Lo, Ingrid & Qiao, Rui, 2021. "Macroeconomic news announcements and market efficiency: Evidence from the U.S. Treasury market," Journal of Banking & Finance, Elsevier, vol. 133(C).
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    6. Kyong Shik Eom & Kyung Yoon Kwon & Sung Chae La & Jong-Ho Park, 2022. "Dynamic and Static Volatility Interruptions: Evidence from the Korean Stock Markets," JRFM, MDPI, vol. 15(3), pages 1-19, February.
    7. Hautsch, Nikolaus & Noé, Michael & Zhang, S. Sarah, 2017. "The ambivalent role of high-frequency trading in turbulent market periods," CFS Working Paper Series 580, Center for Financial Studies (CFS).
    8. Wang, Steven Shuye & Xu, Kuan & Zhang, Hao, 2019. "A microstructure study of circuit breakers in the Chinese stock markets," Pacific-Basin Finance Journal, Elsevier, vol. 57(C).
    9. Hao Li & Zhisheng Li, 2022. "The effect of daily price limits on stock liquidity: Evidence from the Chinese stock market," Accounting and Finance, Accounting and Finance Association of Australia and New Zealand, vol. 62(5), pages 4885-4917, December.
    10. Marjolein E. Verhulst & Philippe Debie & Stephan Hageboeck & Joost M. E. Pennings & Cornelis Gardebroek & Axel Naumann & Paul van Leeuwen & Andres A. Trujillo‐Barrera & Lorenzo Moneta, 2021. "When two worlds collide: Using particle physics tools to visualize the limit order book," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(11), pages 1715-1734, November.
    11. Wong, Kin Ming & Kong, Xiao Wei & Li, Min, 2020. "The magnet effect of circuit breakers and its interactions with price limits," Pacific-Basin Finance Journal, Elsevier, vol. 61(C).
    12. Sifat, Imtiaz Mohammad & Mohamad, Azhar, 2020. "A survey on the magnet effect of circuit breakers in financial markets," International Review of Economics & Finance, Elsevier, vol. 69(C), pages 138-151.
    13. Kyong S. Eom & Kyung Y. Kwon & Jong‐Ho Park, 2021. "Effectiveness of the conditional random‐end trading mechanism on the Korea Exchange: Normal trade and Option Shock," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 41(10), pages 1545-1568, October.
    14. Aloosh, Arash & Choi, Hyung-Eun & Ouzan, Samuel, 2023. "The tail wagging the dog: How do meme stocks affect market efficiency?," International Review of Economics & Finance, Elsevier, vol. 87(C), pages 68-78.
    15. Castro, Carlos & Agudelo, Diego A. & Preciado, Sergio, 2020. "Measuring the effectiveness of volatility auctions," International Review of Economics & Finance, Elsevier, vol. 70(C), pages 566-581.
    16. Bats, Joost & Greif, William & Kapp, Daniel, 2022. "The rise in the cross-sectoral dispersion of earnings expectations during COVID-19," Working Paper Series 2664, European Central Bank.
    17. Sánchez Serrano Antonio, 2020. "High-Frequency Trading and Systemic Risk: A Structured Review of Findings and Policies," Review of Economics, De Gruyter, vol. 71(3), pages 169-195, December.
    18. Xinyue He & Teresa Serra, 2022. "Are price limits cooling off agricultural futures markets?," American Journal of Agricultural Economics, John Wiley & Sons, vol. 104(5), pages 1724-1746, October.

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    More about this item

    Keywords

    trading pause; magnet effect; price discovery; volatility; liquidity;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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