Associate Professor, University of Alicante, Spain
Associate Professor, University of Balearic Islands, Spain
Financial markets implement different types of individual security circuit breakers to protect investors from incurring severe and abrupt losses in times of market stress. Although circuit breakers were already in use, the market crash of October 1987 marks the start of an enduring debate about the need to constrict volatility and how it should be done without harming price efficiency. The recent Flash Crash of May 6, 2010, reignited the debate as discussed in the U.S. Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) report (2010). Even though the eventual cause of the Flash Crash is still debated, regulators and academics agree that the increasing fragmentation of modern financial markets and the different trading procedures across venues may exacerbate high-volatility episodes (Madhavan 1995; Sowers, Kirilenko, and Meng 2012). As a result, market supervisors are calling for new mechanisms to handle periods of unusually high uncertainty within this complex trading environment.
For this renewed interest in circuit breakers, this chapter revises the arguments brandished by both proponents and opponents and the predictions of existing theoretical models to understand the core of the controversy. By reviewing the ...