Effects of a Speed Bump on Market Quality and Exchange Competition
56 Pages Posted: 19 Jun 2018 Last revised: 4 Jun 2020
Date Written: June 03, 2020
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 and reduced order detection and back-running. Reduction in quote-to-trade ratio and 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