This paper examines ex ante effects of 'circuit breakers' (mandated
trading halts). The author shows that circuit breakers, by causing agents
to suboptimally advance trades in time, may have the perverse effect of
increasing price variability and exacerbating price movements. He next
considers a situation in which a circuit breaker causes trading to be
halted in both a 'dominant' (more liquid) and a 'satellite' market. As
agents switch from the dominant market to the satellite market, price
variability and market liquidity decline on the dominant market and
increase on the satellite market.
Copyright 1994 by American Finance Association.