The Flash Crash: A Cautionary Tale about Highly Fragmented Markets
Management Science, Forthcoming
39 Pages Posted: 4 Apr 2013 Last revised: 5 Jan 2018
Date Written: November 15, 2017
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: Suggested Citation