The Flash Crash: The Impact of High Frequency Trading on an Electronic Market
Andrei A. Kirilenko
Brevan Howard Centre for Financial Analysis, Imperial College Business School
Albert S. Kyle
University of Maryland; National Bureau of Economic Research (NBER)
University of North Carolina (UNC) at Chapel Hill - Finance Area
Federal Reserve Board
September 24, 2014
We present an empirical analysis of the Flash Crash – a systemic market event on May 6, 2010. The Flash Crash was blamed on high frequency traders (HFTs) – hyperactive trading algorithms operating inside automated markets. We use audit-trail data for the E-mini S&P 500 futures contract to show that HFTs did not cause the Flash Crash – a large sell program did – but exacerbated the price movement by absorbing immediacy ahead of others. We present novel findings on the trading behavior of HFTs as part of a market ecosystem and propose recommendations for making automated markets more resilient to large liquidity imbalances.
Number of Pages in PDF File: 47
Keywords: High Frequency Trading, Algorithmic Trading, Flash Crash, Liquidity, Volatility, Price Impact, May 6
JEL Classification: G12, G13, G18, G28
Date posted: May 27, 2011 ; Last revised: September 27, 2014
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