The Phases and Catalysts of Mini Flash Crashes

Abstract

Mini flash crashes are rapid volatility events reminiscent of the May 6, 2010 Flash Crash in the US stock market. The frequency of mini flash crashes and their similarity to the Flash Crash provide an avenue to study patterns in order and trade activity during smaller volatility events to gain greater insight into potential activity during larger volatility events. I find a set of potential mini flash crashes using a two-step process. I then divide each mini flash crash into phases, where I define a phase as a stage with the same price directionality. Splitting each mini flash crash into phases facilitates a more dynamic and granular examination of order and trade activity during different stages of a mini flash crash. Using Daily TAQ data, I find that the proportion of sell Inter-market Sweep Orders increases before the price begins to drop. This result suggests that some participants may exacerbate mini flash crashes with certain order and trade practices. Using off-exchange sub-penny trades as a proxy for retail activity, I find a significant increase in volume potentially initiated by retail sell orders executed at or near the lowest price of the mini flash crash, which may indicate that retail investors could be particularly subject to harm during these events.

Keywords: Mini Flash Crash, Flash Crash, Market Micro-structure

JEL Classification: G10, G14