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Market Quality Breakdowns in Equities

  • Cheng Gao

    (Rutgers University)

  • Bruce Mizrach

    ()

    (Rutgers University)

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.

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File URL: http://ssrn.com/abstract=2153909
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Paper provided by Rutgers University, Department of Economics in its series Departmental Working Papers with number 201318.

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Length: 20 pages
Date of creation: 16 Jul 2013
Date of revision:
Handle: RePEc:rut:rutres:201318
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