High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?
46 Pages Posted: 4 Jun 2018 Last revised: 26 Jan 2019
Date Written: April 1, 2018
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: Suggested Citation