The Flash Crash: High-Frequency Trading in an Electronic Market

We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event, known as the Flash Crash, when a large automated sell program was rapidly executed in the E-mini S&P 500 stock index futures market. Using audit trail transaction-level data for the E-mini on May 6 and the previous three days, we find that the trading pattern of the most active non-designated intraday intermediaries (classified as High Frequency Traders) did not change when prices fell during the Flash Crash.

[1]  Thierry Foucault,et al.  Equilibrium Fast Trading , 2014 .

[2]  Joel Hasbrouck,et al.  Low-latency trading $ , 2013 .

[3]  Clara Vega,et al.  Rise of the Machines: Algorithmic Trading in the Foreign Exchange Market , 2009 .

[4]  Thomas H. Mcinish,et al.  The Flash Crash: Trading Aggressiveness, Liquidity Supply, and the Impact of Intermarket Sweep Orders , 2014 .

[5]  Allen Carrion.  Very Fast Money: High-Frequency Trading on the NASDAQ , 2013 .

[6]  T. Hendershott,et al.  High Frequency Trading and Price Discovery , 2013, SSRN Electronic Journal.

[7]  Charles M. Jones,et al.  What Do We Know About High-Frequency Trading? , 2013 .

[8]  George Michailidis,et al.  Discovering the Ecosystem of an Electronic Financial Market with a Dynamic Machine-Learning Method , 2011, Algorithmic Finance.

[9]  Ryan Riordan,et al.  Latency, liquidity and price discovery ☆ , 2012 .

[10]  René Carmona,et al.  High Frequency Market Making , 2012, 1210.5781.

[11]  Ananth Madhavan,et al.  Exchange-Traded Funds, Market Structure, and the Flash Crash , 2012 .

[12]  Thierry Foucault,et al.  News Trading and Speed , 2012 .

[13]  Peter A. Beling,et al.  An agent based model of the E-Mini S&P 500 applied to flash crash analysis , 2011, 2012 IEEE Conference on Computational Intelligence for Financial Engineering & Economics (CIFEr).

[14]  A. Menkveld.  High frequency trading and the new market makers , 2013 .

[15]  Terrence Hendershott,et al.  Automation, Speed, and Stock Market Quality: The NYSE’s Hybrid , 2011 .

[16]  Maureen O'Hara,et al.  The Microstructure of the “Flash Crash”: Flow Toxicity, Liquidity Crashes, and the Probability of Informed Trading , 2011, The Journal of Portfolio Management.

[17]  Stefan Nagel,et al.  Evaporating Liquidity , 2010 .

[18]  Charles M. Jones,et al.  Does Algorithmic Trading Improve Liquidity? , 2010 .

[19]  Andy Puckett,et al.  The Interim Trading Skills of Institutional Investors , 2010 .

[20]  Jakša Cvitanić,et al.  High Frequency Traders and Asset Prices , 2010 .

[21]  Paul J. Irvine,et al.  Institutional Trading and Stock Resiliency: Evidence from the 2007-2009 Financial Crisis , 2012 .

[22]  Mark S. Seasholes,et al.  Individual Investors and Local Bias , 2009 .

[23]  Jiang Wang,et al.  Market Liquidity, Asset Prices, and Welfare , 2008 .

[24]  Jiang Wang,et al.  Liquidity and Market Crashes , 2007 .

[25]  Joel Hasbrouck,et al.  Empirical Market Microstructure: The Institutions, Economics, and Econometrics of Securities Trading , 2007 .

[26]  Sheridan Titman,et al.  Individual Investor Trading and Stock Returns , 2004 .

[27]  Hans R. Stoll,et al.  Electronic Trading in Stock Markets , 2006 .

[28]  T. Hendershott,et al.  Market Maker Inventories and Stock Prices , 2006 .

[29]  R. Mclean.  Intraday Price Formation in U.S. Equity Index Markets , 2004 .

[30]  A. Kurov,et al.  Price Dynamics in the Regular and E-Mini Futures Markets , 2003, Journal of Financial and Quantitative Analysis.

[31]  P. Jain,et al.  Financial Market Design and Equity Premium: Electronic Versus Floor Trading , 2004 .

[32]  Pierre-Olivier Weill,et al.  Leaning Against the Wind , 2003 .

[33]  M. Sewell.  Market Microstructure , 2007 .

[34]  Thierry Foucault,et al.  Market Making with Costly Monitoring: An Analysis of the SOES Controversy , 2003 .

[35]  Ananth N. Madhavan,et al.  Market Microstructure: A Survey , 2000 .

[36]  P. Schultz,et al.  The trading profits of SOES bandits , 1998 .

[37]  Maureen O'Hara,et al.  Market Microstructure Theory , 1995 .

[38]  Ananth Madhavan,et al.  An Analysis of Changes in Specialist Inventories and Quotations , 1993 .

[39]  George Sofianos,et al.  The Trades of Market Makers: An Empirical Analysis of NYSE Specialists , 1993 .

[40]  Sanford J. Grossman,et al.  Liquidity and Market Structure , 1988 .

[41]  A. Kyle.  Continuous Auctions and Insider Trading , 1985 .

[42]  Paul R. Milgrom,et al.  Bid, ask and transaction prices in a specialist market with heterogeneously informed traders , 1985 .

[43]  T. Ho,et al.  The Dynamics of Dealer Markets Under Competition , 1983 .

[44]  H. White.  A Heteroskedasticity-Consistent Covariance Matrix Estimator and a Direct Test for Heteroskedasticity , 1980 .

[45]  Y. Amihud,et al.  Dealership market: Market-making with inventory , 1980 .

[46]  H. Stoll.  THE SUPPLY OF DEALER SERVICES IN SECURITIES MARKETS , 1978 .