A Two-Stage Non Discretionary Trading Suspension Mechanism: Effects on Market Qualityº

We examine the effects of firm-specific trading suspensions triggered by price limit hits on three dimensions of market quality: trading activity, return volatility, and price discovery. The empirical analysis is based on a sample of trading halts on the Italian stock market (Borsa Italiana) and investigates the effects of two alternative trading suspension regimes. Our results reveal mixed evidence about the usefulness of price limit hit trading halts. Our findings support the trading interference hypothesis for volume, the spillover hypothesis for volatility, and the cool off hypothesis for price discovery. The nonstandard procedure used by Borsa Italiana to halt trading in case of limit hits allows us to disentangle the effects of the trading halt itself from the effects of the way in which trading is halted and then resumed after the halt. We name as 'Type 1 ' the trading halts that resume trading with a continuous auction, and 'Type 2 ' the trading halts that employ a batch call auction to restart trading after the suspension. Three main results arise from th