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The impact of Intermarket Sweep Orders on volatility: an agent-based stock market model

Author

Listed:
  • Gianluca P. M. Virgilio

    (Universidad Cátolica Sedes Sapientiae)

  • Pedro Hector Parco Espinoza

    (Universidad Nacional del Centro del Perú)

Abstract

For some time, Intermarket Sweep Orders have been at the center of debate about their alleged harmful impact on orderly functioning of financial markets. This paper contributes to the research by describing the implementation of an Agent-Based Model to simulate the behavior of two markets with the aim to study price movements in presence of such orders. As needed in all simulations, care has been applied to represent all different possibilities and behaviors of agents. On the one side, the findings confirm acceleration of volatility when Intermarket Sweep Orders are executed in quiet markets. Under the exception provided by current regulation, markets may be subject to unexpected turmoil due to trade-through. Indeed, several authors highlight the potential danger for financial stability. On the other side, preliminary results of the simulation suggest that, under exogenous stressed conditions, Intermarket Sweep Orders do not constitute an exacerbating factor and, at the contrary, they may even slightly contribute to re-establish a controlled environment.

Suggested Citation

  • Gianluca P. M. Virgilio & Pedro Hector Parco Espinoza, 2023. "The impact of Intermarket Sweep Orders on volatility: an agent-based stock market model," Economics Bulletin, AccessEcon, vol. 43(1), pages 589-595.
    • Handle: RePEc:ebl:ecbull:eb-22-00446
    as

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    File URL: http://www.accessecon.com/Pubs/EB/2023/Volume43/EB-23-V43-I1-P49.pdf
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    References listed on IDEAS

    as
    1. Justin Cox, 2021. "ISO order imbalances and individual stock returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(1), pages 5-23, April.
    2. Chakravarty, Sugato & Jain, Pankaj & Upson, James & Wood, Robert, 2012. "Clean Sweep: Informed Trading through Intermarket Sweep Orders," Journal of Financial and Quantitative Analysis, Cambridge University Press, vol. 47(2), pages 415-435, April.
    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    Intermarket Sweep Orders; financial stability; Reg NMS; volatility;
    All these keywords.

    JEL classification:

    • G1 - Financial Economics - - General Financial Markets
    • G2 - Financial Economics - - Financial Institutions and Services

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