The Flash Crash: A Review
13 Pages Posted: 28 Nov 2017
Date Written: November 15, 2017
Currently, there is a consensus among practitioners, industry veterans and academic researchers that the use of the state-of-the-art technology in financial sector including trading is inevitable, and HFT is generally beneficial. On the other hand, our collective memory reminds us that any intentional or unintentional misuse of HFT has the risk of market collapse as experienced during the Flash Crash of May 6, 2010. This paper provides an overview of what happened in the financial markets within a few minutes on that day and the collapse happened with its historically unmatched impact. Although the underlying reasons that triggered the Flash Crash are well understood by traders, regulators and researchers and tangible progress has been achieved since then, but still there are crucially significant open issues requiring more sophisticated policies, procedures and regulations to build more robust, fair and transparent financial markets.
Keywords: Algorithmic trading, Electronic trading, High-frequency trading (HFT), Limit order book (LOB), The flash crash, LOB imbalance, Security Information Processor (SIP), National best bid and offer (NBBO), Regulation national market system (Reg NMS), United States Securities and Exchange Commission (SEC)
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