Benefits and Limits of Circuit Breaker: Institutional Design Using Artificial Futures Market

  • Shigeto Kobayashi
  • Takashi Hashimoto


In various stock markets, an institution called a “circuit breaker” exists to interrupt trading of stocks for a certain period when stock prices change significantly. The purpose of this institution is to directly control rapid changes in stock prices and avoid confusion in the market. However, the benefits and drawbacks of the effectiveness of circuit breakers have been discussed back and forth. In this study, we consider the influence of circuit breakers on a futures market by using an artificial market simulator, “U-Mart,” by operating the period of interruption. From experimental results, we found the following: circuit breakers play an important role in controlling price fluctuations and in stabilizing the settlement system, while they also reduce the trading volume. Circuit breakers greatly reduce the volatility when market liquidity is low. In high liquidity situations, circuit breakers prevent the maldistribution of profits, which is caused by an increase in bankruptcies. We also suggest that the period of interruption is an important parameter in the institutional design of a circuit breaker, since the volatility and the number of bankruptcies are sensitive to the period.


circuit breaker U-Mart institutional design artificial market multi-agent simulation 


C63 D02 G19 


Unable to display preview. Download preview PDF.

Unable to display preview. Download preview PDF.


  1. Arthur, W. B., J. Holland, B. LeBaron, R. Palmer and P. Tayler (1997) The Economy as an Evolving Complex System II, Addison-Wesley, Reading, MA, Chap. Asset Pricing Under Endogenous Expectations in an Artificial Stock Market, pp. 15–44.Google Scholar
  2. Bank for International Settlements (2007) “Triennial Central Bank Survey: Foreign Exchange and Derivatives Market Activity in 2007,” Technical report.Google Scholar
  3. “Brady Report” Presidential Task Force on Market Mechanisms (1988) Report of the Presidential Task Force on Market Mechanisms Brady Commission Presidential Task Force on Market Mechanisms. Nicholas F. Brady (Chairman), U.S. Government Printing Office.Google Scholar
  4. Chen, S. H. and T. W. Kuo (2003) “Are Efficient Markets Really Efficient?: Can Financial Econometric Tools Convince Machine Learning People?,” in Computational Intelligence in Economics and Finance, Springer-Verlag.Google Scholar
  5. Fama, E. F. (1989) “Perspectives on October 1987, or What did We Learn from the Crash?,” in R. W Kamphuis, R. C. Kormendi and J. W. H. Watson (eds) Black Monday and the Future of Financial Markets.Google Scholar
  6. Greenwald, B. C. and J. Stein (1988) “The Task Force Report: The Reasoning behind the Recommendations,” Journal of Economic Perspectives 2.3: 3–23.CrossRefGoogle Scholar
  7. Harris, L. (1998) “Circuit Breakers and Program Trading Limits: The Lessons Learned,” in R. E. Litan and A. M. Santomero (eds) Brookings-Wharton Papers on Financial Services, Brookings Institution Press, Washington, D.C., pp. 17–63.Google Scholar
  8. Izumi, K. and K. Ueda (2001) “Phase Transition in a Foreign Exchange Market: Analysis Based on an Artificial Market Approach,” IEEE Transactions on Evolutionary Computation 5.5: 456–470.CrossRefGoogle Scholar
  9. Japan External Trade Organization (2007) “World Trade Matrix (in Japanese)”
  10. Kim, K. and S. G. Rhee (1997) “Price Limit Performance: Evidence from the Tokyo Stock Exchange,” Journal of Finance 52.2: 885–901.CrossRefGoogle Scholar
  11. Kobayashi, S. and T. Hashimoto (2007) “Analysis of Random Agents for Improving Market Liquidity Using Ar-tificial Stock Market,” Proceedings of The Fourth Conference of The European Social Simulation Association (ESSA 4th ’ 07), pp. 315–317.Google Scholar
  12. Kyle, A. S. (1988) “Trading Halts and Price Limits,” Review of Futures Markets 7.3: 426–434.Google Scholar
  13. Omura, K., J. Uno, H. Kawakita and M. Toshino (1998) Microstructure in the Stock Market (in Japanese), Nihon Keizai Shimbun, Inc.Google Scholar
  14. Ono, I., H. Sato, N. Mori, Y. Nakajima, H. Matsui, Y. Koyama and H. Kita (2008) “U-Mart System: A Market Simulator for Analyzing and Designing Institutions,” Evolutionary and Institutional Economics Review 5.1: 63–79.CrossRefGoogle Scholar
  15. Osaka Securities Exchange (2000) Stock Index Futures Trading Manual (in Japanese).Google Scholar
  16. Subrahmanyam, A. (1994) “Circuit Breakers and Market Volatility: A Theoretical Perspective,” Journal of Finance 49: 237–254.CrossRefGoogle Scholar
  17. Takayasu, H. (ed) (2002) Empirical Science of Financial Fluctuations—The Advent of Econophysics, Springer Verlag.Google Scholar
  18. Terano, T., Y Shiozawa, H. Deguchi, H. Kita, H. Matsui, H. Sato and I. Ono (2001) “U-Mart: An artificial Market to Bridge the Studies on Economics and Multi-Agent Systems,” Proceedings of Fourth Pacific Rim International Workshop on Multi-agents, pp. 371–385.Google Scholar
  19. Ueki, J., N. Mori, K. Kai, M. Fukase, H. Sato, G. Goto, T. Ueda, J. Kumei and Y Nakajima (2002) “Simulation Study Using U-Mart (in Japanese),” Papers of the Annual Conference of The JAFEE 6: 323–329.Google Scholar

Copyright information

© Japan Association for Evolutionary Economics 2011

Authors and Affiliations

  1. 1.School of Knowledge ScienceJapan Advanced Institute of Science and Technology (JAIST)IshikawaJapan

Personalised recommendations