We study the introduction of single-market liquidity provider incentives in fragmented securities markets. Specifically, we investigate whether fee rebates for liquidity providers enhance liquidity on the introducing market and thereby increase its competitiveness and market share. Further, we analyze whether single-market liquidity provider incentives increase overall market liquidity available for market participants. Therefore, we measure the specific liquidity contribution of individual markets to the aggregate liquidity in the fragmented market environment. While liquidity and market share of the venue introducing incentives increase, we find no significant effect for turnover and liquidity of the whole market.
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Circuit breakers are volatility safeguards that shall protect markets from extreme price fluctuations, excessive volatility and overreactions. Especially in the context of today's highly automated trading and the large number of transactions conducted by algorithmic and highfrequency trading (HFT) firms, circuit breakers aim at ensuring market stability. Moreover, several flash crash type events, i.e., phases of high volatility and large price swings in very short time spans, have become an increasing phenomenon in recent years highlighting the importance of circuit breakers.Consequently, circuit breakers and their design gained public and regulatory attention, which also led to regulatory initiatives regarding the introduction and the configuration of these mechanisms. While the majority of trading venues has some kind of circuit breaker in place, these safeguards significantly differ in their design, which might be one of the reasons why academic studies come to different conclusions whether circuit breakers are beneficial or not. This paper adds to the literature on circuit breakers by analyzing how different design parameters influence the effectiveness of circuit breakers to calm securities markets during phases of high volatility. For our analysis, we compare volatility interruption mechanisms on two European venues, which differ in relevant design parameters. A volatility interruption is a specific type of circuit breaker that interrupts continuous trading with an unscheduled call auction. Our results show that a shorter duration and narrower price ranges support their effectiveness. The disclosure respectively non-disclosure of triggering thresholds, however, has no effect on the interruption's effectiveness, which might result from the possibility to approximate the thresholds based on tick-by-tick trade data. Furthermore, there is empirical evidence that volatility interruptions triggered by market-wide events are not as effective as interruptions triggered by single-stock events.With our empirical analysis, we show that circuit breakers in the form of volatility interruptions are able to reduce volatility but are also associated with a drop in liquidity. In particular, our results reveal how design parameters such as duration, width of triggering thresholds, and the publication of these thresholds influence the effectiveness of volatility interruptions in reducing volatility and preserving liquidity. These results may serve as a starting point for exchange operators and regulators to review existing circuit breaker designs or to start implementing them AbstractWe investigate different designs of circuit breakers implemented on European trading venues and examine their effectiveness to manage excess volatility and to preserve liquidity. Specifically, we empirically analyze volatility and liquidity around volatility interruptions implemented on the German and Spanish stock market which differ regarding specific design parameters. We find that volatility interruptions in general significantly decrease v...
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