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

75 Pages Posted: 24 Mar 2020 Last revised: 28 Apr 2020

See all articles by Mario Bellia

Mario Bellia

European Union - 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; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice

Roberto Renò

University of Verona - Department of Economics

Date Written: March 2020

Abstract

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

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? (March 2020). SAFE Working Paper No. 270. Available at SSRN: https://ssrn.com/abstract=3560238 or http://dx.doi.org/10.2139/ssrn.3560238

Mario Bellia

European Union - JRC-Ispra, European Commision ( email )

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

Goethe University Frankfurt - Research Center SAFE ( email )

(http://www.safe-frankfurt.de)
Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
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

University of Manchester - Manchester Business School ( email )

Booth Street West
Manchester, M15 6PB
United Kingdom

Loriana Pelizzon (Contact Author)

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

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

Leibniz Institute for Financial Research 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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