Effects of a Speed Bump on Market Quality and Exchange Competition

After a long period of facilitating faster trading, exchanges are now trying to slow down trading with speed bumps. We study how this market-design innovation affects traders’ reaction times, the market quality of stocks, and the operators of competing exchanges. Post speed bump, we find slower reaction times to order book events, reduced order detection, and less back-running. Reduction in flickering quotes improves market quality. Exchanges without planned speed bumps lose market share, with reduced return on their share price, enterprise value, and investment in high-speed assets. Their stocks become attractive for short sellers.

Keywords: Speed bump; High-speed trading; Stock-exchange performance; Multi market trading; Market quality

JEL Classification: G10

Suggested Citation: Suggested Citation

Chakrabarty, Bidisha and Huang, Jianning and Jain, Pankaj K., Effects of a Speed Bump on Market Quality and Exchange Competition (October 25, 2020). Available at SSRN: https://ssrn.com/abstract=3197088 or http://dx.doi.org/10.2139/ssrn.3197088