The Flash Crash: A Cautionary Tale about Highly Fragmented Markets

Management Science, Forthcoming

39 Pages Posted: 4 Apr 2013 Last revised: 5 Jan 2018

Albert J. Menkveld

VU Amsterdam; Tinbergen Institute - Tinbergen Institute Amsterdam (TIA)

Bart Z. Yueshen

INSEAD - Finance

Date Written: November 15, 2017

Abstract

A breakdown of cross-market arbitrage activity makes markets more fragile, and could result in price crashes. We provide supportive evidence for this novel channel based on a high-frequency analysis of the most salient crash in recent history: The Flash Crash. We further show that such event can be extremely costly for a large seller trading in a particular venue as he effectively relies on local liquidity supply only. These findings highlight the vulnerability of today’s highly fragmented markets.

Keywords: flash crash, large seller, electronic market, broken arbitrage

JEL Classification: G10

Suggested Citation

Menkveld, Albert J. and Yueshen, Bart Z., The Flash Crash: A Cautionary Tale about Highly Fragmented Markets (November 15, 2017). Management Science, Forthcoming. Available at SSRN: https://ssrn.com/abstract=2243520 or http://dx.doi.org/10.2139/ssrn.2243520

Albert J. Menkveld

VU Amsterdam ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986130 (Phone)
+31 20 5986020 (Fax)

Tinbergen Institute - Tinbergen Institute Amsterdam (TIA) ( email )

Gustav Mahlerplein 117
Amsterdam, 1082 MS
Netherlands

Bart Zhou Yueshen (Contact Author)

INSEAD - Finance ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

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