High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?
68 Pages Posted: 24 Mar 2020 Last revised: 8 Sep 2020
Date Written: March 1, 2020
We show that High Frequency Traders (HFTs) are not beneficial to the stock market during flash crashes. They actually consume liquidity when it is most needed, even when they are rewarded by the exchange to provide immediacy. The behavior of HFTs exacerbate the transient price impact, unrelated to fundamentals, typically observed during a flash crash. Slow traders provide liquidity instead of HFTs, taking advantage of the discounted price. We thus uncover a trade-off between the greater liquidity and efficiency provided by HFTs in normal times, and the disruptive consequences of their trading activity during distressed times.
Keywords: flash crashes; high-frequency traders (HFTs); liquidity provision; market making
JEL Classification: G10, G14
Suggested Citation: Suggested Citation