Abstract

http://ssrn.com/abstract=1686004
 
 

References (90)



 
 

Citations (76)



 


 



The Flash Crash: The Impact of High Frequency Trading on an Electronic Market


Andrei A. Kirilenko


Massachusetts Institute of Technology (MIT) Sloan School of Management

Albert S. Kyle


University of Maryland; National Bureau of Economic Research (NBER)

Mehrdad Samadi


University of North Carolina (UNC) at Chapel Hill - Finance Area

Tugkan Tuzun


Federal Reserve Board

May 5, 2014


Abstract:     
This study offers an empirical analysis of the events of May 6, 2010, that became known as the Flash Crash. We show that High Frequency Traders (HFTs) did not cause the Flash Crash, but contributed to it by demanding immediacy ahead of other market participants. Immediacy absorption activity of HFTs results in price adjustments that are costly to all slower traders, including the traditional market makers. Even a small cost of maintaining continuous market presence makes market makers adjust their inventory holdings to levels that can be too low to offset temporary liquidity imbalances. A large enough sell order can lead to a liquidity-based crash accompanied by high trading volume and large price volatility - which is what occurred in the E-mini S&P 500 stock index futures contract on May 6, 2010, and then quickly spread to other markets. Based on our results, appropriate regulatory actions should aim to encourage HFTs to provide immediacy, while discouraging them from demanding it, especially at times of significant, but temporary liquidity imbalances. In fast automated markets, this can be accomplished by a more diligent use of short-lived trading pauses that temporarily halt the demand for immediacy, especially if significant order flow imbalances are detected. These short pauses followed by coordinated re-opening procedures would force market participants to coordinate their liquidity supply responses in a pre-determined manner instead of seeking to demand immediacy ahead of others.

Number of Pages in PDF File: 45

Keywords: High Frequency Trading, Algorithmic Trading, Flash Crash, Liquidity, Volatility, Price Impact, May 6

JEL Classification: G12, G13, G18, G28

working papers series


Download This Paper

Date posted: May 27, 2011 ; Last revised: May 6, 2014

Suggested Citation

Kirilenko, Andrei A. and Kyle, Albert S. and Samadi, Mehrdad and Tuzun, Tugkan, The Flash Crash: The Impact of High Frequency Trading on an Electronic Market (May 5, 2014). Available at SSRN: http://ssrn.com/abstract=1686004 or http://dx.doi.org/10.2139/ssrn.1686004

Contact Information

Andrei A. Kirilenko (Contact Author)
Massachusetts Institute of Technology (MIT) Sloan School of Management ( email )
100 Main Street
E62-612
Cambridge, MA 02142
United States
HOME PAGE: http://mitsloan.mit.edu/faculty/detail.php?in_spseqno=54152
Albert (Pete) S. Kyle
University of Maryland ( email )
College Park, MD 20742
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Mehrdad Samadi
University of North Carolina (UNC) at Chapel Hill - Finance Area ( email )
Kenan-Flagler Business School
Chapel Hill, NC 27599-3490
United States
Tugkan Tuzun
Federal Reserve Board ( email )
DC 20551
United States
Feedback to SSRN


Paper statistics
Abstract Views: 35,667
Downloads: 8,606
Download Rank: 255
References:  90
Citations:  76

© 2014 Social Science Electronic Publishing, Inc. All Rights Reserved.  FAQ   Terms of Use   Privacy Policy   Copyright   Contact Us
This page was processed by apollo4 in 0.328 seconds