Liquidity Provision During Circuit Breakers and Extreme Market Movements

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Abstract
On October 27, 1997, circuit breakers caused the New York Stock Exchange (NYSE) to halt trading for the first time in history as the Dow Jones Industrial Average (DJIA) lost 554 points. The next day, the NYSE traded a record 1.2 billion shares as the DJIA increased by 337 points, the largest single-day point gain to date. Using data on the limit order books and specialists? quotes, we examine liquidity provision by limit order traders and floor members during thse extreme market movements. We find evidence that specialists fulfilled their obligations to ?lean against the wind? even though liquidity provision by limit order traders declined precipitously. An analysis of activity during the circuit breaker reveals that limit order traders generally either remained inactive or withdrew liquidity during the market-wide trading halt.