High Frequency Trading Review



    The “Flash Crash” of May 6, 2010 saw some stocks and exchange-traded funds traded at pennies only to rapidly recover in price. We show that the impact of the Flash Crash across stocks is systematically related to prior market fragmentation. Interestingly, fragmentation measured based on quote competition – reflective of higher frequency activity – has explanatory power beyond a more standard volume-based definition. Using intraday trade data from January 1994-September 2011, we find that fragmentation now is at the highest level recorded. We also show divergent intraday behavior of trade and quote fragmentation on the day of the Flash Crash itself. The link to higher frequency quotation activity and the current high levels of fragmentation help explain why a Flash Crash did not occur before and offers a counterpoint to the view that the Flash Crash stemmed from an unlikely confluence of events. Controlling for fragmentation, exchange-traded products were differentially affected reflecting the difficulty in pricing component securities. Market structure reforms enacted since the Flash Crash should help mitigate future such market disruptions, but have not eliminated the possibility that another Flash Crash would occur, albeit with a different catalyst and perhaps in a different asset class.

    Madhavan, Ananth, Exchange-Traded Funds, Market Structure and the Flash Crash (October 10, 2011). Available at SSRN: http://ssrn.com/abstract=1932925 or http://dx.doi.org/10.2139/ssrn.1932925

    Visit resource

    Related content

    News: Goldenberg Hehmeyer LLP extends partnership with Orc for ETF market making
    26 April 2012  – RSS
    Stockholm and London, March 15, 2011 – Orc Software (SSE: ORC), the leading provider of technology and services for the global financial industry, today announced a renewed …

    News: Is Social Media Use Penetrating the Financial Markets?, Advanced Trading
    25 July 2013 – OneMarketData In The News
    Are social media outlets becoming a prominent source for industry experts looking to gather information, develop investment strategies, and capture alpha on a daily basis? If …

    Blog: A UK FTT?
    Sam Tyfield 25 July 2013

    News: TS Associates releases Correlix 5.2 with Analytic Business Reporting Module
    25 July 2013 – TS-Associates
    New York – 18 July 2013: TS‑Associates, leaders in Precision Instrumentation of electronic trading systems, and developers of TipOff®, Correlix™ and Applicat…

    Leave A Reply