Market quality breakdowns in equities

Cheng Gao; Bruce Mizrach

doi:10.1016/j.finmar.2016.03.002

Market quality breakdowns in equities

Cheng Gao, Bruce Mizrach

School of Arts and Sciences, Economics

Research output: Contribution to journal › Article › peer-review

11 Scopus citations

Abstract

Market quality breakdowns are extreme price movements that reverse during the trading day. We analyze changes in the national best bid and offer for all stocks in CRSP and TAQ. The average daily breakdown frequency from 1993 to 2013 is 1.03%, with averages in 2010-2013 only 0.34%. Breakups, extreme price increases, occur as frequently as breakdowns. Breakdowns and breakups have fallen significantly since Regulation National Market System was implemented. Spikes in market correlation make breakdowns and breakups more likely. Both exchange-traded funds and high-frequency trading Granger cause market correlation. Breakdowns and breakups are predictable for up to two days.

Original language	English (US)
Pages (from-to)	1-23
Number of pages	23
Journal	Journal of Financial Markets
Volume	28
DOIs	https://doi.org/10.1016/j.finmar.2016.03.002
State	Published - Mar 1 2016

All Science Journal Classification (ASJC) codes

Finance
Economics and Econometrics

Keywords

Breakdown
Breakup
Correlation
High-frequency trading
Market quality

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10.1016/j.finmar.2016.03.002

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title = "Market quality breakdowns in equities",

abstract = "Market quality breakdowns are extreme price movements that reverse during the trading day. We analyze changes in the national best bid and offer for all stocks in CRSP and TAQ. The average daily breakdown frequency from 1993 to 2013 is 1.03%, with averages in 2010-2013 only 0.34%. Breakups, extreme price increases, occur as frequently as breakdowns. Breakdowns and breakups have fallen significantly since Regulation National Market System was implemented. Spikes in market correlation make breakdowns and breakups more likely. Both exchange-traded funds and high-frequency trading Granger cause market correlation. Breakdowns and breakups are predictable for up to two days.",

keywords = "Breakdown, Breakup, Correlation, High-frequency trading, Market quality",

author = "Cheng Gao and Bruce Mizrach",

note = "Funding Information: We acknowledge financial support from the Intelligence Advanced Research Projects Activity . We thank an anonymous referee, Thierry Foucault, Bruce Lehmann, and seminar participants at the 2014 FINRA/CFP Conference on Market Fragmentation, Fragility and Fees, the 2013 FMA Annual Meeting, the 9th Central Bank Workshop on the Microstructure of Financial Markets, the 2012 CFTC Research Conference, Nasdaq OMX, the Modeling High Frequency Data in Finance Conference, the World Finance & Banking Symposium in Shanghai, and the Market Microstructure and Nonlinear Dynamics Conference in Paris for helpful comments. Publisher Copyright: {\textcopyright} 2016 Elsevier B.V.",

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doi = "10.1016/j.finmar.2016.03.002",

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N1 - Funding Information: We acknowledge financial support from the Intelligence Advanced Research Projects Activity . We thank an anonymous referee, Thierry Foucault, Bruce Lehmann, and seminar participants at the 2014 FINRA/CFP Conference on Market Fragmentation, Fragility and Fees, the 2013 FMA Annual Meeting, the 9th Central Bank Workshop on the Microstructure of Financial Markets, the 2012 CFTC Research Conference, Nasdaq OMX, the Modeling High Frequency Data in Finance Conference, the World Finance & Banking Symposium in Shanghai, and the Market Microstructure and Nonlinear Dynamics Conference in Paris for helpful comments. Publisher Copyright: © 2016 Elsevier B.V.

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N2 - Market quality breakdowns are extreme price movements that reverse during the trading day. We analyze changes in the national best bid and offer for all stocks in CRSP and TAQ. The average daily breakdown frequency from 1993 to 2013 is 1.03%, with averages in 2010-2013 only 0.34%. Breakups, extreme price increases, occur as frequently as breakdowns. Breakdowns and breakups have fallen significantly since Regulation National Market System was implemented. Spikes in market correlation make breakdowns and breakups more likely. Both exchange-traded funds and high-frequency trading Granger cause market correlation. Breakdowns and breakups are predictable for up to two days.

AB - Market quality breakdowns are extreme price movements that reverse during the trading day. We analyze changes in the national best bid and offer for all stocks in CRSP and TAQ. The average daily breakdown frequency from 1993 to 2013 is 1.03%, with averages in 2010-2013 only 0.34%. Breakups, extreme price increases, occur as frequently as breakdowns. Breakdowns and breakups have fallen significantly since Regulation National Market System was implemented. Spikes in market correlation make breakdowns and breakups more likely. Both exchange-traded funds and high-frequency trading Granger cause market correlation. Breakdowns and breakups are predictable for up to two days.

KW - Breakdown

KW - Breakup

KW - Correlation

KW - High-frequency trading

KW - Market quality

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JF - Journal of Financial Markets

ER -

Market quality breakdowns in equities

Abstract

All Science Journal Classification (ASJC) codes

Keywords

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