Do "speed bumps" prevent accidents in financial markets?

  • 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.

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Author:Jorge GonçalvesGND, Roman KräusslORCiDGND, Vladimir Levin
Parent Title (English):Center for Financial Studies (Frankfurt am Main): CFS working paper series ; No. 636
Series (Serial Number):CFS working paper series (636)
Publisher:Center for Financial Studies
Place of publication:Frankfurt, M.
Document Type:Working Paper
Year of Completion:2019
Year of first Publication:2019
Publishing Institution:Universitätsbibliothek Johann Christian Senckenberg
Release Date:2019/11/04
Tag:Mini-flash crash; midpoint extended life order; speed bump
Issue:This version - July 2019
Page Number:32
Institutes:Wirtschaftswissenschaften / Wirtschaftswissenschaften
Wissenschaftliche Zentren und koordinierte Programme / Center for Financial Studies (CFS)
Dewey Decimal Classification:3 Sozialwissenschaften / 33 Wirtschaft / 330 Wirtschaft
JEL-Classification:C Mathematical and Quantitative Methods / C2 Single Equation Models; Single Variables / C21 Cross-Sectional Models; Spatial Models; Treatment Effect Models; Quantile Regressions (Updated!)
Licence (German):License LogoDeutsches Urheberrecht