Exchanges adopted several circuit breakers and program trading limits following the 1987 Stock Market Crash. The intended purpose of these policies was to reduce volatility. Unfortunately, there has not been enough extreme volatility to conclusively determine whether they have been effective. The lack of volatility does not demonstrate their effectiveness since extreme volatility is very rare. Theoretical studies are also inconclusive. Some suggest that circuit breakers help prevent crashes by giving people time to respond with full information. Others suggest that they accelerate price changes caused by traders afraid they may not be able to trade. Some simple principles from political economy suggest why exchanges adopted the circuit breakers that they did.
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