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The Flash Crash: A Cautionary Tale about Highly Fragmented Markets

48 Pages Posted: 4 Apr 2013 Last revised: 14 May 2017

Albert J. Menkveld

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

Bart Z. Yueshen

INSEAD - Finance

Date Written: May 14, 2017

Abstract

A large seller’s E-mini trades reportedly triggered the Flash Crash. This paper adds that cross- market arbitrage (cross-arbitrage for short) first weakened and then broke down completely in the minutes leading up to crash. Absent cross-arbitrage, the seller effectively relied on local liquidity supply only. The overall price he paid for liquidity seems disproportionate. In sum, impaired cross-arbitrage can be especially costly for institutional investors in 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 (May 14, 2017). Available at SSRN: https://ssrn.com/abstract=2243520 or http://dx.doi.org/10.2139/ssrn.2243520

Albert J. Menkveld

VU University 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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