High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?

46 Pages Posted: 4 Jun 2018 Last revised: 26 Jan 2019

See all articles by Mario Bellia

Mario Bellia

European Commission Joint Research Center - JRC-Ispra, European Commision; Goethe University Frankfurt - Research Center SAFE

Kim Christensen

Aarhus University - CREATES

Aleksey Kolokolov

University of Manchester - Manchester Business School

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Roberto Renò

University of Verona - Department of Economics

Date Written: April 1, 2018

Abstract

High Frequency Traders are not beneficial to the liquidity and efficiency of the stock market during flash crashes. Actually, and especially when crashes affect several stocks simultaneously, they consume the liquidity they should pro- vide and originate a transient price impact which is not related to fundamentals. This is true even in a market where market makers are compensated for liquidity provision. The policy implication of our findings is that such a compensation scheme is not sufficient to prevent flash crashes from happening. These facts are uncovered by the analysis of a “big” dataset composed of all orders and transactions on stocks with categorized information about execution.

Keywords: flash crashes; high-frequency traders (HFTs); liquidity provision; market making.

JEL Classification: G10, G14

Suggested Citation

Bellia, Mario and Christensen, Kim and Kolokolov, Aleksey and Pelizzon, Loriana and Renò, Roberto, High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame? (April 1, 2018). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3190321 or http://dx.doi.org/10.2139/ssrn.3190321

Mario Bellia

European Commission Joint Research Center - JRC-Ispra, European Commision ( email )

Via Enrico Fermi 2749, Ispra, VA
Ispra (VA), 21027
Italy

Goethe University Frankfurt - Research Center SAFE ( email )

Frankfurt am Main
Germany

HOME PAGE: http://safe-frankfurt.de/

Kim Christensen

Aarhus University - CREATES ( email )

Department of Economics and Business Economics
Fuglesangs Allé 4
Aarhus V, 8210
Denmark

Aleksey Kolokolov (Contact Author)

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Roberto Renò

University of Verona - Department of Economics ( email )

Via dell'Artigliere, 8
37129 Verona
Italy

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