High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?
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Date
2020-03-01
Author
Bellia, Mario
Christensen, Kim
Kolokolov, Aleksey
Pelizzon, Loriana
Renò, Roberto
SAFE No.
270
Metadata
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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-off between the greater liquidity and efficiency provided by HFTs in normal times, and the disruptive consequences of their trading activity during distressed times.
Research Area
Systemic Risk Lab
Financial Markets
Financial Markets
Keywords
flash crashes, high-frequency traders (hfts), liquidity provision, marketmaking
JEL Classification
G10, G14
Topic
Consumption
Fiscal Stability
Trading and Pricing
Fiscal Stability
Trading and Pricing
Relations
1
Publication Type
Working Paper
Link to Publication
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- LIF-SAFE Working Papers [334]