The impact of Intermarket Sweep Orders on volatility: an agent-based stock market model

Virgilio G.P.M.; Espinoza P.H.P. · Economics Bulletin (2023)

Resumen

For some time, Intermarket Sweep Orders have been at the center of debate about their alleged harmful impact on orderly functioning of financial markets. This paper contributes to the research by describing the implementation of an Agent-Based Model to simulate the behavior of two markets with the aim to study price movements in presence of such orders. As needed in all simulations, care has been applied to represent all different possibilities and behaviors of agents. On the one side, the findings confirm acceleration of volatility when Intermarket Sweep Orders are executed in quiet markets. Under the exception provided by current regulation, markets may be subject to unexpected turmoil due to trade-through. Indeed, several authors highlight the potential danger for financial stability. On the other side, preliminary results of the simulation suggest that, under exogenous stressed conditions, Intermarket Sweep Orders do not constitute an exacerbating factor and, at the contrary, they may even slightly contribute to re-establish a controlled environment. © (2023) Economics Bulletin.

Instituciones: Universidad Católica Sedes Sapientiae; Universidad Nacional del Centro del Perú