{"status":"ok","message-type":"work","message-version":"1.0.0","message":{"indexed":{"date-parts":[[2026,10,24]],"date-time":"2026-10-24T17:38:51Z","timestamp":1792863531343,"version":"4.5.0"},"posted":{"date-parts":[[2026]]},"group-title":"SSRN","reference-count":29,"publisher":"Elsevier BV","license":[{"start":{"date-parts":[[2026,1,1]],"date-time":"2026-01-01T00:00:00Z","timestamp":1767225600000},"content-version":"unspecified","delay-in-days":0,"URL":"https:\/\/creativecommons.org\/licenses\/by-nc-nd\/4.0\/"}],"content-domain":{"domain":[],"crossmark-restriction":false},"short-container-title":[],"abstract":"<jats:p>&lt;div&gt;\n &lt;span&gt;The unprecedented expansion of passive investing\u2014predominantly exchange-traded funds (ETFs) and market-cap weighted index trackers\u2014has fundamentally restructured contemporary equity markets, now accounting for over 50% of aggregate domestic public equity assets. We emphasize from the outset that this investigation does not constitute a normative critique of passive investing; low-cost index funds have delivered undeniable welfare enhancements to retail investors by eliminating excessive management fees, democratizing capital market participation, and avoiding idiosyncratic active manager underperformance. Rather, our inquiry addresses a fundamental fallacy of composition and an acute macro-microstructural externality: while passive allocation is individually rational for single market participants, its aggregate dominance starves the continuous double auction of price-sensitive, information-gathering capital.&lt;\/span&gt;\n&lt;\/div&gt;\n&lt;div&gt;\n &lt;br&gt;\n&lt;\/div&gt;\n&lt;div&gt;\n This paper formulates an ultra-high-performance, discrete-event agent-based model (ABM) implemented in Rust equipped with an endogenous Limit Order Book (LOB) executing continuous double auctions under strict Price-Time (FIFO) priority to investigate the empirical breakdown of price discovery, emergent liquidity black holes, and systemic crisis vulnerabilities as passive market share (\u03b1) escalates. Incorporating heterogeneous market participants\u2014fundamental value mean-reversion traders facing stochastic jump-diffusion information, Avellaneda-Stoikov inventory-optimizing market makers, adaptive Brock-Hommes switching traders, noise and momentum trend-followers, and systematic TWAP indexers\u2014we execute extensive, embarrassingly parallel Monte Carlo simulations sweeping \u03b1 \u2208 [0.0, 0.95] across K = 100 independent seeds and T = 200,000 discrete ticks per regime (totaling 240M ticks across 1,200 trajectories). We calibrate event arrivals and Pareto order size distributions (\u03b1_size = 1.7436, implied CCDF tail \u03bc_tail = 0.7436) against empirical Level 3 LOBSTER data from NASDAQ (N = 100,000 events, T_obs = 1,998.57 s).\n&lt;\/div&gt;\n&lt;div&gt;\n &lt;br&gt;\n&lt;\/div&gt;\n&lt;div&gt;\n Our results demonstrate that market efficiency does not degrade linearly; rather, markets experience an asymmetric U-shaped trajectory with an acute phase transition around a critical threshold \u03b1* \u2248 0.85. Beyond \u03b1*, fundamental order flow is insufficient to anchor prices, resulting in a sharp surge in tracking divergence (RMSE(P, V) escalates from 1.6670 at \u03b1 = 0.60 and 1.7113 at \u03b1 = 0.50 to 1.9605 at \u03b1 = 0.85, 2.0185 at \u03b1 = 0.90, and 2.8599 at \u03b1 = 0.95, an expansion of +71.6%), order book depth starvation (D_bid \u2192 0), and severe leptokurtic fat tails (\u03ba rising from 3.56 at \u03b1 = 0.70 and 4.09 at \u03b1 = 0.80 to 5.42 at \u03b1 = 0.85 and 12.37 at \u03b1 = 0.95). Furthermore, high-precision semi-parametric Geweke-Porter-Hudak (\u03c3(d) = 0.0224, bandwidth m = 823) and Robinson Local Whittle estimates confirm stationary fractional volatility dynamics across all regimes (d \u2208 [0.1368, 0.3899]). In addition, an endogenous Brock-Hommes evolutionary simulation demonstrates that rational information cost economization drives \u03b1_t from initial low levels directly into this critical fragility zone (\u03b1* \u2248 0.85). Finally, adversarial stress testing demonstrates the microstructural mechanisms of predatory front-running and short raids, while macroeconomic crisis shocks encounter liquidity vacuums where panic redemptions trigger price overshoot ratios reaching 4.27\u00d7 at \u03b1 = 0.85 and 7.04\u00d7 at \u03b1 = 0.95. These findings provide formal microstructural evidence for the Grossman-Stiglitz informational paradox under passive market saturation and offer actionable market design recommendations to preserve the virtues of indexation while safeguarding financial stability.\n&lt;\/div&gt;<\/jats:p>","DOI":"10.2139\/ssrn.7652221","type":"posted-content","created":{"date-parts":[[2026,10,23]],"date-time":"2026-10-23T09:06:46Z","timestamp":1792746406000},"source":"Crossref","is-referenced-by-count":0,"title":["The Breakdown of Price Discovery at the Critical Threshold of Passive Investment: An Agent-based Limit Order Book 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