The World Federation of Exchanges(WFE), the global industry group for exchanges and central counterparties (CCPs), has published a research paper titled ‘Circuit breakers and other market safeguards,’ as part of the industry’s work on systemic resilience and the structures that support market integrity.
Circuit breakers are mechanisms that temporarily halt continuous trading or delay an auction as and when excessive volatility disrupts the price discovery function of exchanges.
The new research paper, the first of a two-part series, examines and analyses the kind of circuit breakers and other safeguards that are most prevalent among exchanges today 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.
According to WFE, circuit breakers are in place in a large majority of exchanges surveyed (86 per cent), although there is some degree of variation in their design or in their calibration.
WFE explains this reflects differences in both the markets themselves and in their respective regulatory regimes.
Further key findings from the report note that circuit breakers are more prevalent in cash than in derivatives markets (84 per cent versus 67 per cent), while a large proportion of respondents (67 per cent) confirmed circuit breakers were triggered during March 2020.
As a result of these events, WFE says some exchanges (30 per cent) have reviewed or are expecting to review their calibration.
Meanwhile, none of the respondents saw coordination of circuit breakers across venues or jurisdictions as a priority.
Additionally, the report finds that the correct calibration of circuit breakers was ranked by participants as the most relevant practical question relating to market safeguards, followed by an assessment of their effectiveness.
Circuit breakers re-entered the policy debate in spring 2020 because of the heightened volatility experienced by financial markets in March 2020, at the first peak of the COVID-19 pandemic in Europe, which triggered trading halts in numerous markets worldwide.
WFE highlights that higher volatility is expected to remain a feature of 2021, and according to Nandini Sukumar, CEO of the WFE, the events of the last year have led to a renewed interest in the usefulness and benefits of circuit breakers and in their design.
“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,” says Sukumar.
Pedro Gurrola-Perez, head of research at the WFE, adds: ‘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.”
Other recent research from the WFE suggests market activity swiftly recovered from the pandemic.
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