V-shapes

Abstract

We propose a new methodology to locate price reversals (V-shapes), the main signature of market fragility, in price records. Our new detection method is consistent with the forensic definition used by the SEC in legal charges for market access rule violation causing flash crashes. Our applications show that recent years have seen an increase in the frequency and severity of mini-flash crashes, with and an increasing participation of high frequency traders during these events, and that transient inefficiencies are not necessarily short-lived and imply significant wealth redistribution when coupled with frictions such as a supply shock.

Keywords: Price reversals, flash crashes, market violations, high-frequency traders, financial fragility, auction cycle

JEL Classification: G14, G12, C58