Order Aggressiveness and Flash Crashes
60 Pages Posted: 23 Aug 2017 Last revised: 6 Aug 2020
Date Written: August 21, 2017
We present a novel framework illustrating the links between order aggressiveness and flash crashes. Our framework involves a trading sequence beginning with significant increases in aggressive sell orders relative to aggressive buy orders until instruments’ prices fall to their lowest levels. Thereafter, a rise in aggressive buy orders propels prices back to their pre-crash levels. Using a sample of S&P 500 stocks trading during the May 6, 2010 flash crash, we show that our framework is correctly specified and provide a basis for linking flash crashes to aggressive strategies, which are found to be more profitable during flash crashes.
Keywords: order aggressiveness, flash crashes, high-frequency traders, volatility, high-frequency data.
JEL Classification: G14, G15, G18
Suggested Citation: Suggested Citation