Market quality breakdowns in equities

Market quality breakdowns are extreme price movements that reverse during the trading day. We analyze changes in the national best bid and offer for all stocks in CRSP and TAQ. The average daily breakdown frequency from 1993 to 2013 is 1.03%, with averages in 2010-2013 only 0.34%. Breakups, extreme price increases, occur as frequently as breakdowns. Breakdowns and breakups have fallen significantly since Regulation National Market System was implemented. Spikes in market correlation make breakdowns and breakups more likely. Both exchange-traded funds and high-frequency trading Granger cause market correlation. Breakdowns and breakups are predictable for up to two days.