The Flash Crash: A Cautionary Tale About Highly Fragmented Markets

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.

• 저널Management Science · 65(10) · 4470–4488
• 토픽Financial Markets and Investment Strategies · Finance
• DOI10.1287/mnsc.2018.3040
• 저자Albert J. Menkveld, Bart Zhou Yueshen