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

39 Pages Posted: 7 Oct 2013 Last revised: 27 Feb 2014

Tommi A. Vuorenmaa

Triangle Intelligence

Liang Wang

University of Cambridge

Date Written: 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.

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

JEL Classification: C15, C63, G01

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: https://ssrn.com/abstract=2336772 or http://dx.doi.org/10.2139/ssrn.2336772

Tommi A. Vuorenmaa (Contact Author)

Triangle Intelligence ( email )

Helsinki
Finland
+358-40-7757766 (Phone)

HOME PAGE: http://tommiavuorenmaa.net/

Liang Wang

University of Cambridge ( email )

Computer Laboratory
William Gates Building, 15 JJ Thomson Ave
Cambridge, CB3 0FD
United Kingdom

HOME PAGE: http://www.cl.cam.ac.uk/~lw525/

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