Heterogeneous criticality in high frequency finance: a phase transition in flash crashes

Jeremy D. Turiel and Tomaso Aste

LSE Research Online Documents on Economics from London School of Economics and Political Science, LSE Library

Abstract: Flash crashes in financial markets have become increasingly important, attracting attention from financial regulators, market makers as well as from the media and the broader audience. Systemic risk and the propagation of shocks in financial markets is also a topic of great relevance that has attracted increasing attention in recent years. In the present work, we bridge the gap between these two topics with an in-depth investigation of the systemic risk structure of co-crashes in high frequency trading. We find that large co-crashes are systemic in their nature and differ from small ones. We demonstrate that there is a phase transition between co-crashes of small and large sizes, where the former involves mostly illiquid stocks, while large and liquid stocks are the most represented and central in the latter. This suggests that systemic effects and shock propagation might be triggered by simultaneous withdrawals or movement of liquidity by HFTs, arbitrageurs and market makers with cross-asset exposures.

Keywords: criticality; financial networks; flash crash; high frequency trading; market microstructure; phase transition; systemic risk (search for similar items in EconPapers)
JEL-codes: F3 G3 (search for similar items in EconPapers)
Pages: 12 pages
Date: 2022-02-10
New Economics Papers: this item is included in nep-ban, nep-cwa, nep-mst and nep-rmg
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (2)

Published in Entropy, 10, February, 2022, 24(2). ISSN: 1099-4300

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Persistent link: https://EconPapers.repec.org/RePEc:ehl:lserod:113892

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