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Modelling and mitigation of Flash Crashes

Author

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  • Fry, John
  • Serbera, Jean-Philippe

Abstract

The algorithmic trading revolution has had a dramatic effect upon markets. Trading has become faster, and in some ways more efficient, though potentially at the cost higher volatility and increased uncertainty. Stories of predatory trading and flash crashes constitute a new financial reality. Worryingly, highly capitalised stocks may be particularly vulnerable to flash crashes. Amid fears of high-risk technology failures in the global financial system we develop a model for flash crashes. Though associated with extreme forms of illiquidity and market concentration flash crashes appear to be unpredictable in advance. Several measures may mitigate flash crash risk such as reducing the market impact of individual trades and limiting the profitability of high-frequency and predatory trading strategies.

Suggested Citation

  • Fry, John & Serbera, Jean-Philippe, 2017. "Modelling and mitigation of Flash Crashes," MPRA Paper 82457, University Library of Munich, Germany.
    • Handle: RePEc:pra:mprapa:82457
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    File URL: https://mpra.ub.uni-muenchen.de/82457/1/MPRA_paper_82457.pdf
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    References listed on IDEAS

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    6. Boulton, Thomas J. & Braga-Alves, Marcus V. & Kulchania, Manoj, 2014. "The flash crash: An examination of shareholder wealth and market quality," Journal of Financial Intermediation, Elsevier, vol. 23(1), pages 140-156.
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    Cited by:

    1. Virgilio, Gianluca Piero Maria, 2020. "When spread bites fast – Volatility and wide bid-ask spread in a mixed high-frequency and low-frequency environment," Research in International Business and Finance, Elsevier, vol. 51(C).

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    More about this item

    Keywords

    Flash Crashes; Flash Rallies; Econophysics; Regulation;
    All these keywords.

    JEL classification:

    • C1 - Mathematical and Quantitative Methods - - Econometric and Statistical Methods and Methodology: General
    • F3 - International Economics - - International Finance
    • G1 - Financial Economics - - General Financial Markets
    • K2 - Law and Economics - - Regulation and Business Law

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