The Flash Crash: A Cautionary Tale About Highly Fragmented Markets
Albert J. Menkveld, Bart Zhou Yueshen
Management Science · 2019 · Volume 65 · Issue 10
Abstract
A breakdown of cross-market arbitrage activity could make markets more fragile and result in price crashes. We provide suggestive evidence for this novel channel based on a high-frequency analysis of the most salient crash in recent history: The Flash Crash. We further show that such an event can be extremely costly for a large seller trading in a particular venue as the seller effectively relies on local liquidity supply only. These findings highlight the vulnerability of today’s highly fragmented markets. This paper was accepted by Gustavo Manso, finance.
Keywords
flash crash, large seller, electronic market, broken arbitrage
Enable JavaScript for citation tools and additional paper interactions.