Modelling and mitigation of Flash Crashes

John Fry and Jean-Philippe Serbera

MPRA Paper from University Library of Munich, Germany

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.

Keywords: Flash Crashes; Flash Rallies; Econophysics; Regulation (search for similar items in EconPapers)
JEL-codes: C1 F3 G1 K2 (search for similar items in EconPapers)
Date: 2017-09-12
New Economics Papers: this item is included in nep-mst and nep-rmg
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