Journal of Financial Markets 7 (2004) 301–333 Trading strategies during circuit breakers and extreme market movements Michael A. Goldstein a, *, Kenneth A. Kavajecz b a Joseph Winn Term Chair, Finance Department, Babson College, 223 Tomasso Hall, Babson Park, MA 02457-0310, USA b School of Business, University of Wisconsin - Madison, 975 University Avenue, Madison, WI 53706, USA Received 1 April 2003; accepted 6 November 2003 Abstract We study the trading strategies of NYSE market participants through their choice of venue, order type and timing during the turbulent October 1997 period. During this period, we find the implicit costs of supplying liquidity through the electronic limit order book become so high as to induce market participants to withdraw depth from the book, opting instead for the flexibility and discretion of floor trading. In addition, we find that ahead of a market-wide closure, market participants display behavior consistent with the magnet effect, while during the market-wide closure they curtail activity. Our results have implications for the viability of ECNs and electronic limit order books during turbulent periods as well as regulation aimed at maintaining the orderly working of markets during crisis periods. r 2004 Elsevier B.V. All rights reserved. JEL classification: G10; G18; G23; G24; G28 Keywords: Liquidity provision; Limit order book; Market crash; Circuit breaker; Electronic versus floor trading 1. Introduction The equity trading landscape is made up of many different trading systems, each with its own unique set of advantages and disadvantages. On one end of the spectrum are electronic limit order books, which provide fast executions and yield low transaction costs. Prominent examples include the New York Stock Exchange’s ARTICLE IN PRESS *Corresponding author. Tel.: +1-781-239-4402. E-mail addresses: goldstein@babson.edu (M.A. Goldstein), kkavajecz@bus.wisc.edu (K.A. Kavajecz). 1386-4181/$-see front matter r 2004 Elsevier B.V. All rights reserved. doi:10.1016/j.finmar.2003.11.003