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

Journal of Economic Behavior & Organization, 2019, vol. 157, issue C, 15-41

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)
JEL-codes: C63 G01 G12 (search for similar items in EconPapers)
Date: 2019
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0167268117301142
Full text for ScienceDirect subscribers only

Related works:
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 (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)
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:eee:jeborg:v:157:y:2019:i:c:p:15-41

DOI: 10.1016/j.jebo.2017.04.013

Access Statistics for this article

Journal of Economic Behavior & Organization is currently edited by Houser, D. and Puzzello, D.

More articles in Journal of Economic Behavior & Organization from Elsevier
Bibliographic data for series maintained by Catherine Liu ().