Effects of a Speed Bump on Market Quality and Exchange Competition
59 Pages Posted: 8 Nov 2018 Last revised: 1 Oct 2019
Date Written: September 30, 2019
After a long period of high-speed 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 depth changes consistent with 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 assets, stock returns, and enterprise value. 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