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High-frequency trading during flash crashes: Walk of fame or hall of shame?

Mario Bellia, Kim Christensen, Aleksey Kolokolov, Loriana Pelizzon () and Roberto Renò

No 270, SAFE Working Paper Series from Leibniz Institute for Financial Research SAFE

Abstract: We show that High Frequency Traders (HFTs) are not beneficial to the stock market during flash crashes. They actually consume liquidity when it is most needed, even when they are rewarded by the exchange to provide immediacy. The behavior of HFTs exacerbate the transient price impact, unrelated to fundamentals, typically observed during a flash crash. Slow traders provide liquidity instead of HFTs, taking advantage of the discounted price. We thus uncover a trade-o. between the greater liquidity and efficiency provided by HFTs in normal times, and the disruptive consequences of their trading activity during distressed times.

Keywords: flash crashes; high-frequency traders (HFTs); liquidity provision; marketmaking (search for similar items in EconPapers)
JEL-codes: G10 G14 (search for similar items in EconPapers)
Date: 2020
New Economics Papers: this item is included in nep-mst
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