Abstract

http://ssrn.com/abstract=2336772
 
 

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An Agent-Based Model of the Flash Crash of May 6, 2010, with Policy Implications


Tommi A. Vuorenmaa


Triangle Intelligence

Liang Wang


University of Helsinki - Department of Computer Science

February 26, 2014


Abstract:     
We describe an agent-based framework that successfully simulates the key aspects of the most famous flash crash in history: the Flash Crash of May 6, 2010. In our model, market making high-frequency traders collectively create a feedback loop system triggered by a large institutional sell, consistent with the widely cited "hot-potato effect." With the help of simulations, we discover functional relationships between the number of HFT market makers, their inventory sizes or speed, and the probability of another similar flash crash. The model can be used for stress-testing algorithms before their production stage and to give sounder policy advice.

Number of Pages in PDF File: 39

Keywords: agent-based model, feedback loop, flash crash, high-frequency trading, hot-potato effect, market regulations, tick size

JEL Classification: C15, C63, G01

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Date posted: October 7, 2013 ; Last revised: February 27, 2014

Suggested Citation

Vuorenmaa, Tommi A. and Wang, Liang, An Agent-Based Model of the Flash Crash of May 6, 2010, with Policy Implications (February 26, 2014). Available at SSRN: http://ssrn.com/abstract=2336772 or http://dx.doi.org/10.2139/ssrn.2336772

Contact Information

Tommi A. Vuorenmaa (Contact Author)
Triangle Intelligence ( email )
Helsinki
Finland
+358-40-7757766 (Phone)
HOME PAGE: http://tommiavuorenmaa.net/
Liang Wang
University of Helsinki - Department of Computer Science ( email )
P.O. 68 (Gustaf Hällströmin katu 2b)
Helsinki, 00014
Finland
+358443499955 (Phone)
HOME PAGE: http://www.cs.helsinki.fi/liang.wang
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