Breaking news

TL;DR

This paper investigates how regulatory circuit breakers during breaking news events in high-frequency markets impact price discovery, revealing that such rules can cause deviations from fundamental prices and lead to market distortions.

Contribution

It develops a regression-based test for fundamental pricing that accounts for non-instantaneous transitions, addressing limitations of traditional jump estimators in noisy high-frequency data.

Findings

Breaking news triggers are linked to systematic overshooting in prices.

Regulatory rules can distort the natural price discovery process.

The proposed test effectively detects deviations from fundamental prices.

Abstract

This paper examines how regulatory interventions in high-frequency financial markets affect price discovery. We focus on Breaking news, where dynamic circuit breakers trigger trading halts immediately after the release of macroeconomic fundamentals. Within a high-frequency signal-in-noise model, we show that triggering rules complicate statistical inference for the price impact of news, rendering conventional non-parametric jump estimators inconsistent. Building on this insight, we develop a regression-based test for fundamental pricing that accounts for non-vanishing transition times. The test compares transition price changes to efficient jumps implied by observable factors. Our empirical analysis of CME E-mini S\&P 500 futures shows that Breaking news are associated with systematic deviations from fundamental pricing, predominantly in the form of overshooting. Our findings highlight a regulatory trade-off: the appeal of simple and transparent circuit breaker rules must be weighed against their cost of preventing fundamentals from being priced contemporaneously, thereby creating adverse incentives and introducing distortions.