Slow-Moving Capital and Execution Costs: Evidence from a Major Trading Glitch

Vincent Bogousslavsky, Pierre Collin-Dufresne and Mehmet Sağlam
Additional contact information
Vincent Bogousslavsky: Boston College
Pierre Collin-Dufresne: Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and National Bureau of Economic Research (NBER)
Mehmet Sağlam: University of Cincinnati

No 18-41, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We investigate the impact of an exogenous trading glitch at a high-frequency market-making firm on standard measures of stock liquidity (effective and realized spreads) as well as on institutional trading costs (Implementation Shortfall and VWAP slippage) obtained from a proprietary data set. We find that stocks in which the firm accumulated large positions as a result of the trading glitch become substantially more illiquid on the day of the glitch. Effective spreads revert very quickly suggesting that market liquidity is resilient. Instead, institutional trading costs remain significantly higher for more than one week. We further document that all stocks for which the firm was a designated market maker become more illiquid, even if they were not heavily traded during the glitch, in the two days prior to being reassigned to another market maker. These findings are broadly consistent with 'slow-moving capital' theories and suggest that high-frequency trading 'flash crashes' may be associated with significant costs that are difficult to detect using standard liquidity measures.

Keywords: Liquidity; Algorithmic Trading; Institutional Trading Costs; Slow-Moving Capital; Market Making (search for similar items in EconPapers)
JEL-codes: G10 (search for similar items in EconPapers)
Pages: 47 pages
Date: 2018-05
New Economics Papers: this item is included in nep-mst
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2613667 (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1841

Access Statistics for this paper

More papers in Swiss Finance Institute Research Paper Series from Swiss Finance Institute Contact information at EDIRC.
Bibliographic data for series maintained by Ridima Mittal ().