The Flash Crash: A Cautionary Tale about Highly Fragmented Markets

54 Pages Posted: 4 Apr 2013 Last revised: 4 Apr 2016

Albert J. Menkveld

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

Bart Z. Yueshen

INSEAD - Finance

Date Written: April 2, 2016

Abstract

A large fundamental seller’s E-mini trades reportedly triggered the Flash Crash. Analysis of his trades reveals that the crash is not simply the price paid for demanding immediacy in the S&P 500. We develop an alternative explanation. Cross-market arbitrage, which effectively connects an E-mini seller to S&P 500 buyers in other markets, broke one minute before the crash. The seller was forced to find buyers in E-mini only. A calibration exercise suggests that, as a result, the seller overpaid for immediacy. In sum, broken arbitrage can be extremely 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 (April 2, 2016). 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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