The Determinants of ETF Trading Pauses on August 24th, 2015
Feb. 23, 2016
Austin Gerig and Keegan Murphy
Abstract:
This paper analyzes the causes of extreme price volatility that triggered limit up-limit down (LULD) trading pauses in many exchange traded funds (ETFs) on August 24th, 2015. We find that LULD pauses in ETFs resulted from both a spike in trading volume and a pullback in liquidity supply. Furthermore, we find that an ETF’s correlation with the S&P 500 index was a strong and significant predictor of LULD pauses and that an ETF’s turnover (average daily share volume/shares outstanding) was negatively related to LULD pauses. Finally, to demonstrate the explanatory power of these factors, we show that volume spikes, liquidity drops, S&P 500 correlations, and turnover performed very well at separating otherwise similar ETFs into those that paused and those that did not.