Circuit Breakers: A Tool to Secure Financial Stability

Stefan Larsen

Student thesis: Master thesis

Abstract

This thesis examines the effect of the new European law requiring equity markets in the European Union to have effective systems to halt trading in case of a significant price movement in a financial institution on a specific market or a related market during a short period. By analyzing the requirements of the newly implemented law, the thesis investigates the effects of the new mechanism as a tool to stabilize the financial market. One of the main elements of circuit breakers is the possibility to only close the affected market. In the MiFID II directive, is a general requirement to have single stock level circuit breakers, thereby only limiting the stock which is affected and allowing the rest of the market to proceed non-affected. The thesis analyzes the economic value of three kinds of situations: a situation with simultaneous decision-making; a situation with sequential decision-making; and a situation with sequential decisionmaking, but where market-participators can relocate their activities to non-affected market, that has not been closed off by the single stock circuit breaker. The law in its stat today is not sufficient because it only relocates market activities, that does not help market stability and is one of the main goals behind the new European law. The thesis finally combines the legal and the economic conclusions in an integrated law and economics perspective. Legal policy theory is used to suggest how the law should be designed to avoid market fluctuations across financial instruments. Concluded, that the efficient way to avoid the fluctuation would be to implement the American model, where both a single-stock level mechanism and a marketwide circuit breaker is present. The thesis finally concludes that the law in its present form is not efficient nor avoids market volatility. The implementation of the American model, is found to maximize the overall welfare by limiting the market participants by not being able to move market activity

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
LanguageDanish
Publication date2018
Number of pages85
SupervisorsPeer Schaumburg-Müller & Kalle Rose