Market Microstructure Design and Flash Crashes: A Simulation Approach

Posted: 8 Dec 2012 Last revised: 5 Jan 2013

See all articles by Charles R. Plott

Charles R. Plott

California Institute of Technology - Division of the Humanities and Social Sciences

Paul Brewer

Economic & Financial Technology Consulting LLC; Self Employed Consultant

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences

Date Written: December 3, 2012

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 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.

Keywords: Market Microstructure, flash crash, high frequency trading, call markets, market regulation, market simulation

JEL Classification: G17, G18

Suggested Citation

Plott, Charles R. and Brewer, Paul and Cvitanic, Jaksa, Market Microstructure Design and Flash Crashes: A Simulation Approach (December 3, 2012). Available at SSRN: https://ssrn.com/abstract=2186548

Charles R. Plott (Contact Author)

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
337 Baxter Hall
Pasadena, CA 91125
United States
626-395-4209 (Phone)

Paul Brewer

Economic & Financial Technology Consulting LLC ( email )

4219 Shady Oak Dr
Ooltewah, TN 37363
United States
4237166500 (Phone)

Self Employed Consultant ( email )

Jaksa Cvitanic

California Institute of Technology - Division of the Humanities and Social Sciences ( email )

1200 East California Blvd.
Pasadena, CA 91125
United States

HOME PAGE: http://www.hss.caltech.edu/~cvitanic/

Here is the Coronavirus
related research on SSRN

Paper statistics

Abstract Views
440
PlumX Metrics