The FCA has published a webpage containing an analysis of circuit breakers in UK equity markets. The FCA first explains how circuit breakers work and then sets out its assessment of how market quality changes before, during and after the triggering of a circuit breaker, and how different groups of market participants behave during these events.
The FCA states that the period immediately prior to the triggering of the circuit breaker, trading volumes rise and volatility increases significantly. The FCA has found that in the five minute period after a circuit breaker is triggered and the London Stock Exchange (LSE) conducts a call auction, trading largely dries up on other UK trading venues and is effectively suspended on dark pools, with subdued quoted depth and wide effective spreads. The FCA states that this suggests that, for the most part, trading and price formation do not shift to these venues when continuous trading on the LSE is not available. High trading volumes are then executed in the LSE’s call auction and, in the period after the trading halt, there is a relatively fast reversion to equilibrium levels of quoted depth, effective spreads and general trading activity across all markets. The FCA also states that its analysis indicates that, in aggregate, high-frequency trading firms effectively ‘lean against the wind’ during these episodes of high price volatility.
View FCA analysis of circuit breakers in UK equity markets, 3 August 2017