How effective are trading pauses?

Abstract

Exploiting NASDAQ order book data and difference-indifferences methodology, we identify the distinct effects of trading pause mechanisms introduced on U.S. stock exchanges after May 2010. We show that the mere existence of such a regulation constitutes a safeguard which makes market participants behave differently in anticipation of a pause. Pauses tend to break local price trends, make liquidity suppliers revise positions, and enhance price discovery. In contrast, pauses do not have a "cool off" effect on markets, but rather accelerate volatility and bid-ask spreads. This implies a regulatory trade-off between the protective role of trading pauses and their adverse effects on market quality.

The Ambivalent Role of High-Frequency Trading in Turbulent Market Periods

“…Introducing "speed bumps" by removing speed advantages beyond a given threshold (e.g., 350 microseconds as on the U.S. exchange IEX, see Financial Times (2016)) appears to be a viable option achieving both objectives and mitigating ongoing technological arms races for speed advantages. Moreover, safeguards such as trading pauses (see, e.g., Hautsch & Horvath (2017)) and smart market monitoring tools are inevitable in order to protect investors from flash crashes and ensuring a certain level of market stability in extreme periods. Table A2: This table gives an overview of the macroeconomic announcements used in this study.…”

Portfolio Liquidation Under Transient Price Impact – Theoretical Solution and Implementation With 100 NASDAQ Stocks

“…3We choose not to perform the comparison for strategy TMP since the block trades calculated are frequently multiplies of current liquidity available in our order book, which will likely to trigger a trading pause or halt. Without certain assumptions on how market react after such events, our results most likely will be inaccurate; see Hautsch and Horvath (2018), for example, in which the authors investigate how trading pauses affect liquidity. Table 4: Summary statistics for the market impact factors.…”

Do volatility extensions improve the quality of closing call auctions?

“…It is well-known, however, that volatility curbs influence trader behavior also in anticipation of an intervention (see, e.g., Hautsch & Horvath, 2019;Subrahmanyam, 1994).…”