Tuesday, July 9, 2019
Jorge Goncalves, Roman Kräussl and Vladimir Levin have posted Do 'Speed Bumps' Prevent Accidents in Financial Markets? on SSRN with the following abstract:
Is it true that speed bumps level the playing field, make financial markets more stable and reduce negative externalities of high frequency trading (HFT) firms? We examine how the implementation of a particular speed bump - Midpoint Extended Life order (M-ELO) on Nasdaq impacted financial markets stability in terms of occurrences of mini-flash crashes in individual securities. We use high frequency order book message data around the implementation date and apply difference-in-differences analysis to estimate the average treatment effect of the speed bump on market stability and liquidity provision. The results suggest that the introduction of the M-ELO decreases the average number of crashes on Nasdaq compared to other exchanges by 4.7%. Liquidity provision by HFT firms also improves. These findings imply that technology-based solutions by exchanges are feasible alternatives to regulatory intervention towards safer markets.