Prices and Price Limits

Abstract

This paper studies the effects of price limits implemented by the Securities and Exchange Commission (SEC) after the May 2010 ‘Flash Crash.’ The security-level price limits halt trading after a security’s price experiences a sudden and large movement. The difference-in-difference design exploits the staggered introduction of the limits to address omitted variable concerns. The data show that price limits reduce the frequency and severity of extreme price movements, but induce price underreaction. The results are consistent with Subrahmanyam’s (1997) theory that price limits cause informed traders to be less aggressive.