Transactional Risk, Market Crashes, and the Role of Circuit Breakers

Whilst the greatest effort has been made to ensure the quality of this text, due to the historical nature of this content, in some rare cases there may be minor issues with legibility. We develop a pair of models that illustrate how imperfections in transactional mechanisms can lead to a market crash. Neither market orders nor limit orders allow traders to condition their demands on the full information set needed to achieve a Walrasian outcome. When volume shocks are sufficiently large, the deviations from Walrasian prices and allocations are large also. Properly designed and implemented, circuit breakers may help to overcome some of these informational problems, and thereby improve the market's ability to absorb large volume shocks.