Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading

Sandrine Jacob Leal () and Mauro Napoletano
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Sandrine Jacob Leal: CEREFIGE - Centre Européen de Recherche en Economie Financière et Gestion des Entreprises - UL - Université de Lorraine

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Abstract: We investigate the effects of a set of regulatory policies directed towards high-frequency trading (HFT) through an agent-based model of a limit order book able to generate flash crashes as the result of the interactions between low- and high-frequency traders. In particular, we study the impact of the imposition of minimum resting times, of circuit breakers, of cancellation fees and of transaction taxes on asset price volatility and on the occurrence and the duration of flash crashes. Monte-Carlo simulations reveal that HFT-targeted policies imply a trade-off between market stability and resilience. Indeed, we find that policies able to tackle volatility and flash crashes also hinder the market from quickly recovering after a crash. This result is mainly due to the dual role of HFT, as both a cause of flash crashes and a key player in the post-crash recovery.

Keywords: High-frequency trading; Flash crashes; Regulatory policies; Agent-based models; Limit order book; Market volatility (search for similar items in EconPapers)
Date: 2019-01
Note: View the original document on HAL open archive server: https://sciencespo.hal.science/hal-03403589
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Citations: View citations in EconPapers (1)

Published in Journal of Economic Behavior and Organization, 2019, 157, pp.15-41. ⟨10.1016/j.jebo.2017.04.013⟩

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Related works:
Journal Article: Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading (2019)
Working Paper: Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading (2019)
Working Paper: Market stability vs. Market resilience: Regulatory policies experiments in an agent based model with low-and high -frequency trading (2016)
Working Paper: Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High-Frequency Trading (2016)
Working Paper: Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High-Frequency Trading (2016)
Working Paper: Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High- Frequency Trading (2016)
Working Paper: Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High-Frequency Trading (2016)
Working Paper: Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent-Based Model with Low- and High- Frequency Trading (2016)
Working Paper: Market Stability vs. Market Resilience: Regulatory Policies Experiments in an Agent Based Model with Low- and High-Frequency Trading (2016)
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Persistent link: https://EconPapers.repec.org/RePEc:hal:spmain:hal-03403589

DOI: 10.1016/j.jebo.2017.04.013

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