Abstract

We examine the benefits and costs of the short sale circuit breaker (Rule 201) for NYSE and Nasdaq stocks. Not only that the circuit breaker failed to reduce intraday volatility and intraday price decline in the market, evidence suggests that it worsens the event day return and price decline for the most volatile stocks. Market quality in terms of liquidity and fair pricing are unaffected. However, informational efficiency after large price movements is considerably improved by the short sale circuit breaker. Evidence also suggests that triggering the circuit breaker is not a small-cap phenomenon.