ABSTRACT
This white paper proposes a new design for circuit breaker mechanism that offers an endogenously determined trigger based on the degree of real-time information asymmetry to replace traditional ex-ante, fixed-percentage thresholds. Traditional circuit breakers can exacerbate market crashes due to the magnet effect and prompt High-Frequency Traders (HFTs) to withdraw liquidity when facing order flow toxicity. To shift the purpose of circuit breakers from ex-post market calming to ex-ante market warning, the white paper operationalizes a Kalman filtering framework to track transaction prices as noisy signals of a latent efficient price. By isolating private signal precision relative to public information precision, the framework quantifies the dynamic level of information asymmetry. The paper offers policy applications, including designing new dynamic triggers based on the degree of information asymmetry and optimizing halt durations for different stock groups. The new metric can also be used to enhance the existing Exchange surveillance practices, and provide another criterion for inclusion in headline indices to help protect market quality.