Circuit Breakers as a Tool to Ensure Financial Stability

Sarah Damsgaard Schlægelberger

Student thesis: Master thesis


This thesis wishes to examine whether present law ensure legislators aim to secure a well-functioning and effective capital market for the benefit of the financial stability. By analysing present law in chapter 2 it is considered whether the operators of regulated markets authorization to temporarily halt or constrain trading ensures not only system resilience but also legislators aim to minimize the risks of financial instability. Sudden and drastic price movements in the market of capital, is from a legislators perspective seen as a source to instability and has with the introduction of trading technology become a matter of importance for not only the financial supervisory authorities but also in general the regulators. Despite contradictory arguments about whether circuit breakers shall be seen as suitable systems to prevent liquidity crisis and therefore instability, it is thus found that systems which automatic interrupts trading when prices move above pre-determined threshold from a legislator’s perspective shall be seen as a key tool to ensure the financial systems stability and therefore avoid any possible instability because of significant volatility. From an economic perspective, it is in chapter 3 considered to what extent and when the usage of the authorization to temporarily halt or constrain trading is socially welfare efficient. With the introduction of new trading technologies, financial markets have observed a change. Being under constantly monitoring, algorithms take an active part in forming the markets but are at risk of generating market crisis through undesirable behaviour. Price movements, which are found unrelated to economic fundamentals, tend to prevent the market to allocate capital efficiently, why circuit breakers are activated to calm the market with the purpose to uphold the financial stability. The usage of the operator’s authorization is concluded only to be socially welfare efficient, when price movements are caused by external variables. In the light of the assessments in chapter 2 and 3, it will be discussed to what extend KML § 117 ensures a more efficient, well-functioning and effective capital market for the benefit of financial stability. This is done by comparing and discussing the legal framework against the economic assumptions and arguments concerning when it is efficient for the operator of regulated markets to activate the circuit breaker. It is finally concluded in chapter 5 that present law to a certain extent has a negative impact, and therefore does not ensure an efficient, well-functioning and effective capital markets in all market states.

EducationsMSc in Commercial Law, (Graduate Programme) Final Thesis
Publication date2018
Number of pages81
SupervisorsPeer Schaumburg-Müller & Kalle Rose