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Order dynamics during the flash crash

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Abstract

US common stocks are simultaneously traded on multiple trading centers. We study quotes and trades with millisecond time stamps during the flash crash of May 6, 2010, and document new findings about order dynamics when the fragmented market is under stress. First, relative to May 5, 2010, the number of trades and the number of quotes quadrupled on May 6, 2010. Second, during the flash crash, the proportional time of a trading center offering the best bid/ask quotes substantially reduced on all trading centers, while the effectiveness of turning best quotes into trades increased on almost all trading centers. Third and most importantly, we find significant changes in the level of trade (or quote) fragmentation during the flash crash for stocks with a high or low level of fragmentation, but no significant change for stocks with a fragmentation level in the middle range. These findings together demonstrate that, despite the dramatic increase in the number of quotes, there was insufficient liquidity on all trading centers, and stocks with a medium level of trade (or quote) fragmentation were most resilient to the sudden order flow shock.

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Notes

  1. Two prominent examples of these market glitches are the IPO debacle of the third-largest US stock exchange, BATS, on March 23, 2012, and the huge trading loss of the market-maker firm, Knight Capital Group Inc, on August 1, 2012, which led to the firm being acquired eventually.

  2. The executive summary of his report “Regulation NMS Part I: Loved or loathed and why many want it to die” is available at http://www.tabbgroup.com/PublicationDetail.aspx?PublicationID=1302.

  3. See her speech at the Security Traders Association 80th Annual Market Structure Conference on October 2, 2013.

  4. On April 21, 2015, Navinder Singh Sarao, a London-based futures trader, was arrested on charges in connection with his role in the flash crash. He allegedly used an automated trading program to manipulate the market for E-Mini S&P 500 futures contracts (E-Minis) on the Chicago Mercantile Exchange (CME). His implementation of high-speed manipulative trading strategies might have triggered the Flash Crash (DoJ 2015). Sarao pleaded guilty to fraud in November 2016.

  5. We sincerely thank an anonymous reviewer for comments and suggestions that motivate the analysis in this section.

  6. We thank an anonymous reviewer for suggesting this direction of future research.

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Authors and Affiliations

  1. Department of Finance, College of Business, Florida State University, Tallahassee, FL, 32306-1110, USA

    James S. Ang

  2. Mitchell College of Business, University of South Alabama, Mobile, AL, 36688, USA

    Kenneth J. Hunsader

  3. School of Accounting and Finance, Faculty of Business, The Hong Kong Polytechnic University, Kowloon, Hong Kong

    Shaojun Zhang

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  1. James S. Ang
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  2. Kenneth J. Hunsader
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  3. Shaojun Zhang
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Correspondence to Kenneth J. Hunsader.

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Ang, J.S., Hunsader, K.J. & Zhang, S. Order dynamics during the flash crash. J Asset Manag 20, 365–383 (2019). https://doi.org/10.1057/s41260-019-00129-1

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