CaltechAUTHORS
  A Caltech Library Service

Market Microstructure Design and Flash Crashes: A Simulation Approach

Brewer, Paul and Cvitanić, Jakša and Plott, Charles R. (2013) Market Microstructure Design and Flash Crashes: A Simulation Approach. Journal of Applied Economics, 16 (2). pp. 223-250. ISSN 1514-0326. https://resolver.caltech.edu/CaltechAUTHORS:20140103-132748356

[img]
Preview
PDF (Social Science Working Paper 1365) - Discussion
See Usage Policy.

812Kb

Use this Persistent URL to link to this item: https://resolver.caltech.edu/CaltechAUTHORS:20140103-132748356

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.


Item Type:Article
Related URLs:
URLURL TypeDescription
http://www.hss.caltech.edu/SSPapers/sswp1365.pdfAuthorDiscussion Paper
http://dx.doi.org/10.1016/S1514-0326(13)60010-0DOIArticle
http://www.sciencedirect.com/science/article/pii/S1514032613600100PublisherArticle
http://resolver.caltech.edu/CaltechAUTHORS:20170727-091614199Related ItemSSWP 1365
ORCID:
AuthorORCID
Cvitanić, Jakša0000-0001-6651-3552
Contact Email Address:drpaulbrewer@gmail.com
Additional Information:© 2013 Universidad del CEMA. Published by Elsevier B.V. The authors would like to gratefully acknowledge the support of the California Laboratory for Experimental Economics and Political Science (EEPS) and the Gordon and Betty Moore Foundation. Formerly SSWP 1365.
Funders:
Funding AgencyGrant Number
Caltech Laboratory for Experimental Economics and Political ScienceUNSPECIFIED
Gordon and Betty Moore FoundationUNSPECIFIED
Subject Keywords: market microstructure; flash crash; high frequency trading; call markets; market regulation; market simulation
Issue or Number:2
Classification Code:JEL classification codes: G17; G18
Record Number:CaltechAUTHORS:20140103-132748356
Persistent URL:https://resolver.caltech.edu/CaltechAUTHORS:20140103-132748356
Official Citation:Paul Brewer, Jaksa Cvitanic, Charles R. Plott, MARKET MICROSTRUCTURE DESIGN AND FLASH CRASHES: A SIMULATION APPROACH, Journal of Applied Economics, Volume 16, Issue 2, November 2013, Pages 223-250, ISSN 1514-0326, http://dx.doi.org/10.1016/S1514-0326(13)60010-0. (http://www.sciencedirect.com/science/article/pii/S1514032613600100)
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:43205
Collection:CaltechAUTHORS
Deposited By: Tony Diaz
Deposited On:03 Jan 2014 22:10
Last Modified:03 Oct 2019 06:05

Repository Staff Only: item control page