Volume Limit: An Effective Response to the India Flash Crash?

Abstract

This paper assesses the recently enacted securities regulation, called the volume limit, by the Securities and Exchange Board of India. It reviews the literature on the negative consequences of large sale volumes on the stability of the stock market. The paper also examines the recent development of high-frequency trading in India. The two investigations unveil areas in which the regulation is effective and those in which it is inadequate. That is, the effectiveness of the regulation of the volume limit lies in reducing large price impacts due to genuine transactions. However, the inadequacy of this regulation is exposed when manipulation tactics arise regarding order display, such as spoofing by certain high-frequency traders.