 Crowdedness, mispricing, crashes, and spikesBoulis Maher Ibrahim and Iordanis Angelos Kalaitzoglou Journal of Banking & Finance, 2025, vol. 177, issue C Abstract: This study proposes “reflexive crowdedness” as a mechanism through which order flow can become toxic at ultra-high frequencies (UHFs). Crowdedness, a coordination problem arising from the inability of traders to accurately gauge competition, leads to significant unbalanced mispricing in the form of liquidity costs. This mispricing is amplified by (reflexive) feedforward loops between liquidity and price components and can accumulate rapidly when high-speed traders engage. We develop an empirical framework to examine this mechanism in UHF trading. Results on trades of Dow 30 stocks show that reflexive crowdedness triggers speculative algorithmic trading and drives order flow toxicity and market instability at high frequencies. We formulate a UHF measure of reflexive crowdedness and find it predicts various UHF phenomena, including flash crashes and spikes, more reliably than price volatility and the Volume Synchronised Probability of Informed Trading (VPIN). This makes this measure highly relevant to investors, traders, market operators, and regulators. Keywords: Crowdedness; Microstructure; Arbitrage capacity; Overreaction; High frequency trading (HFT) (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:jbfina:v:177:y:2025:i:c:s0378426625001050 DOI: 10.1016/j.jbankfin.2025.107485 Access Statistics for this article Journal of Banking & Finance is currently edited by Ike Mathur More articles in Journal of Banking & Finance from Elsevier |
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