Year: 2013
Type: article
Abstract: We study consequences of regulatory interventions in limit order markets that aim at stabilizing the market after an occurrence of a “flash crash”. We use a simulation platform that creates random arrivals of trade orders, that allows us to analyze subtle theoretical features of liquidity and price variability under various market structures. The simulations are performed under continuous double-auction microstructure, and under alternatives, including imposing minimum resting times, shutting off trading for a period of time, and switching to call auction mechanisms. We find that the latter is the most effective in restoring the liquidity of the book and recovery of the price level. However, one has to be cautious about possible consequences of the intervention on the traders' strategies, including an undesirable slowdown of a convergence to a new equilibrium after a change in fundamentals.
Source: Journal of Applied Economics
Authors: Paul Brewer, Jaksa Cvitanic, Charles R. Plott
Institution: California Institute of Technology
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: bronze
OpenAlex ID: W1972470933