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This paper investigates the intraday effects on market quality of a unique trading suspensionmechanism in place at the Italian stock market (Borsa Italiana) in case of price limit hit.Specifically, when prices hit the limit, Borsa Italiana halts trading for 5 minutes ('freezephase') and removes the order that caused the limit to be hit. If trading regularly resumesafter the freeze phase, exchange officials make no other intervention and we call thissequence of events 'Type 1' halt (i.e., freeze-only halt). Alternatively, if a second limit hitoccurs after the freeze phase, an intraday call auction replaces the continuous trading. Wename this sequence 'Type 2' halt (i.e., intraday auction halt).We examine both the general effects of trading halts and the specific effects of Type 1 andType 2 trading suspensions on three dimensions of market quality: trading activity, returnvolatility, and price discovery. The full sample results reveal mixed evidence about theusefulness of price limit hit trading halts: trading volume and return volatility after the haltare abnormally high (trading interference hypothesis for volume and spillover hypothesis forvolatility), whereas prices converge towards equilibrium values (cool off hypothesis forprice discovery). When we partition the sample by type of halt three main results arise.First, Type 2 halts always show larger abnormal volume measures than Type 1 and thisindicates a greater interference on the normal trading process of Type 2 relative to Type 1halts. Second, Type 2 halts show lower post-halt abnormal volatility than Type 1. Thismight be explained by the difference in the way the market restarts after the halt. The callauction procedure associated with Type 2 allows for wider information dissemination,whereas the price discovery process in Type 1 trading halts takes place only through thetâtonnement process in continuous trading. Third, for the price discovery process, the callauction reopening procedure of Type 2 halts also has a stronger cool off effect relative to theType 1 continuous trading.

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