The ex ante effects of trade halting rules on informed trading strategies and market liquidity

Abstract

Abstract In this paper, we investigate strategic informed trading in a regime with rule‐based market closures. Closure rules can be designed to reduce the ex ante trading costs of liquidity traders but cause informed traders to scale back their trading in order to reduce the chance of the closure being triggered. In the Stackelberg equilibrium where the informed act as leaders and market makers as followers, this phenomenon causes trading costs for small investors to increase. Thus, ex ante strategic behavior by informed traders in response to closure rules can result in increased trading costs for precisely the individuals whom the closures are intended to benefit: namely, the uninformed retail investors who trade small orders. We show, however, that this effect can be mitigated by randomizing the halting rule and thus reducing the degree of predictability of the halt from the perspective of informed traders.

Cite this work

No public copy is stored for this record, so only the metadata is cited.

Stored only when both papers are in the corpus — 40 citations exist upstream.

Papers that cite the same references — the relational fallback while embeddings are still backfilling.