Abstract

We investigate the impact of an exogenous trading glitch at a high-frequency market-making firm on standard measures of stock liquidity (spreads, price impact, turnover, and depth) and institutional trading costs (implementation shortfall and VWAP slippage). Stocks in which the firm accumulates large long (short) positions increase (decrease) by about 4% during the glitch and become substantially more illiquid. It takes one day for prices and spread-based liquidity measures to revert. Institutional trading costs, however, remain significantly higher for more than one week. Both liquidity measures are also weakly correlated outside the glitch period, suggesting they capture different aspects of liquidity.

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