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Slow-Moving Capital and Execution Costs: Evidence from a Major Trading Glitch

Author

Listed:
  • Vincent Bogousslavsky

    (Boston College)

  • Pierre Collin-Dufresne

    (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and National Bureau of Economic Research (NBER))

  • Mehmet Sağlam

    (University of Cincinnati)

Abstract

We investigate the impact of an exogenous trading glitch at a high-frequency market-making firm on standard measures of stock liquidity (effective and realized spreads) as well as on institutional trading costs (Implementation Shortfall and VWAP slippage) obtained from a proprietary data set. We find that stocks in which the firm accumulated large positions as a result of the trading glitch become substantially more illiquid on the day of the glitch. Effective spreads revert very quickly suggesting that market liquidity is resilient. Instead, institutional trading costs remain significantly higher for more than one week. We further document that all stocks for which the firm was a designated market maker become more illiquid, even if they were not heavily traded during the glitch, in the two days prior to being reassigned to another market maker. These findings are broadly consistent with 'slow-moving capital' theories and suggest that high-frequency trading 'flash crashes' may be associated with significant costs that are difficult to detect using standard liquidity measures.

Suggested Citation

  • Vincent Bogousslavsky & Pierre Collin-Dufresne & Mehmet Sağlam, 2018. "Slow-Moving Capital and Execution Costs: Evidence from a Major Trading Glitch," Swiss Finance Institute Research Paper Series 18-41, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1841
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2613667
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    Cited by:

    1. Eaton, Gregory W. & Irvine, Paul J. & Liu, Tingting, 2021. "Measuring institutional trading costs and the implications for finance research: The case of tick size reductions," Journal of Financial Economics, Elsevier, vol. 139(3), pages 832-851.

    More about this item

    Keywords

    Liquidity; Algorithmic Trading; Institutional Trading Costs; Slow-Moving Capital; Market Making;
    All these keywords.

    JEL classification:

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

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