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Market Quality Breakdowns in Equities

Author

Listed:
  • Cheng Gao

    (Rutgers University)

  • Bruce Mizrach

    () (Rutgers University)

Abstract

A breakdown in market quality occurs when an order book thins to the point where extreme price movements are observed. These are frequently reversed as the market learns that nothing fundamental has occurred. The daily average breakdown frequency from 1993-2011 is 0.64%, with averages in 2010-11 below this amount. Controlling for microstructure effects, breakdowns have fallen significantly since Reg NMS. Spikes in market correlation and high frequency trading surges make breakdowns more likely. ETFs break down more often than non-ETFs. Both ETFs and high frequency trading Granger cause market correlation. Breakdowns are predictable for up to two days.

Suggested Citation

  • Cheng Gao & Bruce Mizrach, 2013. "Market Quality Breakdowns in Equities," Departmental Working Papers 201318, Rutgers University, Department of Economics.
  • Handle: RePEc:rut:rutres:201318
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    References listed on IDEAS

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    1. Craig W. Holden & Stacey Jacobsen, 2014. "Liquidity Measurement Problems in Fast, Competitive Markets: Expensive and Cheap Solutions," Journal of Finance, American Finance Association, vol. 69(4), pages 1747-1785, August.
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    3. Christie, William G & Harris, Jeffrey H & Schultz, Paul H, 1994. " Why Did NASDAQ Market Makers Stop Avoiding Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1841-1860, December.
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    5. Christie, William G & Schultz, Paul H, 1994. " Why Do NASDAQ Market Makers Avoid Odd-Eighth Quotes?," Journal of Finance, American Finance Association, vol. 49(5), pages 1813-1840, December.
    6. Bennett, Paul & Wei, Li, 2006. "Market structure, fragmentation, and market quality," Journal of Financial Markets, Elsevier, vol. 9(1), pages 49-78, February.
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    Cited by:

    1. Elias Strehle, 2016. "Are Order Anticipation Strategies Harmful? A Theoretical Approach," Papers 1609.00599, arXiv.org, revised Sep 2017.
    2. Schlepper, Kathi, 2016. "High-frequency trading in the Bund futures market," Discussion Papers 15/2016, Deutsche Bundesbank.

    More about this item

    Keywords

    market quality; breakdown; ETF; correlation;

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates

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