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Do "speed bumps" prevent accidents in financial markets?

Jorge Gonçalves, Roman Kräussl and Vladimir Levin

No 636, CFS Working Paper Series from Center for Financial Studies (CFS)

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.

Keywords: mini-flash crash; speed bump; midpoint extended life order (search for similar items in EconPapers)
JEL-codes: C21 G14 G18 (search for similar items in EconPapers)
Date: 2019
New Economics Papers: this item is included in nep-mst and nep-rmg
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:cfswop:636

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