Market stability vs. market resilience: Regulatory policies experiments in an agent-based model with low- and high-frequency trading

Authored by Mauro Napoletano, Sandrine Jacob Leal

Date Published: 2019

DOI: 10.1016/j.jebo.2017.04.013

Sponsors: European Union

Platforms: No platforms listed

Model Documentation: Other Narrative Mathematical description

Model Code URLs: Model code not found

Abstract

We investigate the effects of a set of regulatory policies directed towards high-frequency trading (HFT) through an agent-based model of a limit order book able to generate flash crashes as the result of the interactions between low- and high-frequency traders. In particular, we study the impact of the imposition of minimum resting times, of circuit breakers, of cancellation fees and of transaction taxes on asset price volatility and on the occurrence and the duration of flash crashes. Monte-Carlo simulations reveal that HFT-targeted policies imply a trade-off between market stability and resilience. Indeed, we find that policies able to tackle volatility and flash crashes also hinder the market from quickly recovering after a crash. This result is mainly due to the dual role of HFT, as both a cause of flash crashes and a key player in the post-crash recovery. (C) 2017 Elsevier B.V. All rights reserved.

Tags

Performance Dynamics Financial market Risk Market volatility Power Volatility transaction taxes Agent-based models Limit order book Crashes High-frequency trading Regulatory policies Flash crashes Circuit-breakers Heterogeneous beliefs