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Market Microstructure Design and Flash Crashes: A Simulation Approach

Brewer, Paul J. and Cvitanić, Jakša and Plott, Charles R. (2012) Market Microstructure Design and Flash Crashes: A Simulation Approach. Social Science Working Paper, 1365. California Institute of Technology , Pasadena, CA. (Unpublished)

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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 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 long term consequences of the intervention on the traders’ strategies.

Item Type:Report or Paper (Working Paper)
Related URLs:
URLURL TypeDescription ItemPublished Article
Cvitanić, Jakša0000-0001-6651-3552
Additional Information:The authors would like to gratefully acknowledge the support of the Caltech Laboratory for Experimental Economics and Political Science (EEPS), and the Gordon and Betty Moore Foundation.
Group:Social Science Working Papers
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
Series Name:Social Science Working Paper
Issue or Number:1365
Classification Code:JEL: G17, G18
Record Number:CaltechAUTHORS:20170727-091614199
Persistent URL:
Usage Policy:No commercial reproduction, distribution, display or performance rights in this work are provided.
ID Code:79481
Deposited By: Hanna Storlie
Deposited On:07 Aug 2017 18:31
Last Modified:03 Oct 2019 18:20

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