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Slow-moving capital and execution costs: Evidence from a major trading glitch

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  • Bogousslavsky, Vincent
  • Collin-Dufresne, Pierre
  • Sağlam, Mehmet

Abstract

We investigate the impact of an exogenous trading glitch at a high-frequency market-making firm on standard measures of stock liquidity (spreads, price impact, turnover, and depth) and institutional trading costs (implementation shortfall and volume-weighted average price slippage). Stocks in which the firm accumulates large long (short) positions increase (decrease) by about 4% during the glitch and become substantially more illiquid. It takes one day for prices and spread-based liquidity measures to revert. Institutional trading costs, however, remain significantly higher for more than one week. Both liquidity measures are also weakly correlated outside the glitch period, suggesting they capture different aspects of liquidity.

Suggested Citation

  • Bogousslavsky, Vincent & Collin-Dufresne, Pierre & Sağlam, Mehmet, 2021. "Slow-moving capital and execution costs: Evidence from a major trading glitch," Journal of Financial Economics, Elsevier, vol. 139(3), pages 922-949.
    • Handle: RePEc:eee:jfinec:v:139:y:2021:i:3:p:922-949
    DOI: 10.1016/j.jfineco.2020.08.009
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    More about this item

    Keywords

    Slow-moving capital; Market making; Liquidity; Algorithmic trading; Institutional trading costs;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)

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