Circuit Breakers, Trading Collars, and Volatility Transmission Across Markets: Evidence from NYSE Rule 80A

Date01 August 2015
Published date01 August 2015
The Financial Review 50 (2015) 459–479
Circuit Breakers, Trading Collars, and
Volatility Transmission Across Markets:
Evidence from NYSE Rule 80A
Michael A. Goldstein
Babson College
The NYSE’s Rule 80A attempted to delink the futures and equity markets by limiting
index arbitrage trades in the same direction as the last trade to reduce stock market volatility.
Rule 80A leads to a small but statistically significant decline in intraday U.S. equity market
volatility.In addition, the results are asymmetric: volatility is dampened more in a rising market
than in a declining one. These results suggest that, to a limited extent, rule restrictions on trading
can sufficiently delink the futures and equity markets enough to reduce the transmission of
Keywords: circuit breakers, trading collars, trading halts, NYSE Rule 80A, microstructure,
volatility transmission
JEL Classifications: G18, G19, G24, G28
Corresponding author: Finance Department, Babson College,231 Forest Street, Babson Park, MA 02457-
0310; Phone: (781) 239-4402; Fax: (781) 239-5004; E-mail:
The author would like to thank Mark Ventimiglia,formerly of the International and Research Division of
the NYSE, for providing the data for this study and Alejandro Latorre, formerly of the Capital Markets
Function of the Federal Reserve Bank of New Yorkfor excellent research assistance. Additional thanks go
to Robert VanNess (the editor), Joan Evans, James Mahoney, and participants at the Second Joint Central
Bank Research Conference on Risk Measurement and Systematic Risk in Tokyo, Japan. Much of this
analysis was completed when the author was the VisitingEconomist at the NYSE. The views expressed in
this paper do not necessarily reflect those of the NYSE. An early version of this paper was titled “Circuit
Breakers, Volatility, and the U.S. Equity Markets: Evidence from NYSE Rule 80A.”
C2015 The Eastern Finance Association 459
460 M. A. Goldstein/The Financial Review 50 (2015) 459–479
1. Introduction
For almost 30 years, a consistent concern for regulators and practitioners alike
has been the possibility of the transmission of volatility from the derivatives markets
(such as the futures market) to the primary market (such as the equity market), and
for good reason. The October 19, 1987 Black Monday market crash was blamed on
program trading and the selling of stock index futures due to portfolio insurance,
some of which was arbitraging the difference in prices between the Chicago futures
market and the equity markets in New York.1The Presidential Task Force on Market
Mechanisms (1988), commonly called the Brady Commission Report, noted that
"[s]elling pressure in the futures market was transmitted to the stock market by
the mechanism of index arbitrage" (p. v).2Over two decades later, the joint report
by the Securities and Exchange Commission and the Commodity Futures Trading
Commission (2010) notes that the May 6, 2010 Flash Crash was also due to volatility
transmission from the Standard & Poor’s 500 (S&P 500) futures market to the equity
The October 1987 Market Crash and the May 2010 Flash Crash demonstrate
the notable effects of volatility transmission from the futures markets to the eq-
uity markets. Despite the distance between Chicago and New York, the increased
use of computerization of the markets and their linkages has caused movements
in the Chicago futures markets to impact prices in the New York equity markets
with increasing speed. Laughlin, Aguirre and Grundfest (2014) examine information
transmission from the Chicago futures markets to the New York equity markets, and
show that in April 2010 (immediately prior to the May 2010 Flash Crash) trades in
the futures markets in Chicago impacted equity prices in New York within 7.25 to
8 milliseconds later. They also showthat by August 2012 (after the Flash Crash), due
to increasingly sophisticated microwave towers that are increasingly better located,
the data indicate that this transmission time dropped to 4.2 to 5.2 milliseconds.3
Given the impact of the linkages across these markets, an interesting question is
whether rules and regulations could delink the futures and equity markets in such a
1On the 20th anniversary of the 1987 Crash, NYU Professor Richard Sylla noted in Lobb (2007): “The
internal reasons included innovations with index futures and portfolio insurance. I’ve seen accounts that
maybe roughly half the trading on that day was a small number of institutions with portfolio insurance.
Big guys were dumping their stock. Also, the futures market in Chicago was even lower than the stock
market, and people tried to arbitrage that. The proper strategy was to buy futures in Chicago and sell in
the New Yorkcash market. It made it hard – the portfolio insurance people were also trying to sell their
stock at the same time.”
2In addition, the Presidential Task Force on Market Mechanisms (1988) emphasized that these markets
are linked and integrated: “[f]rom an economic viewpoint, what have been traditionally seen as separate
markets — the markets for stocks, stock index futures, and stock options — are in fact one market” (p. vi).
3Laughlin, Aguirre and Grundfest (2014) suggest that future improvements could drop the time to about
4.03 milliseconds, approaching the theoretical minimum of 3.93 milliseconds that is limited by the speed
of light. See Angel (2014) for a further discussion of the impact of regulation related to the intersection of
physics and finance.

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