The fash cash high frequency trading in an electronic market
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The fash cash high frequency trading in an electronic market
The Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market ntraday market intermediat ion in an electronic market before and (luringa period of large and temporary selling pressure. On May 6. 2010, U.S. financial markets experienced a systemic intraday event t he Flash Crash where a large automated selling program was rapidly executed in the E-mini s&p 500 The fash cash high frequency trading in an electronic market stock index futures market.. Using audit trail transaction-level data for the E-mini on May 6 and the previous three days, we find that the trading paThe fash cash high frequency trading in an electronic market
ttern of the most active nondesignatx-d intraday intermediaries (classified as High Frequency Tr.wiers) did not change when prices fell during the FlaThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market is with the Federal Reserve Board of Governors. We thank Robert Engle, Chester Spatt, Larry Harris, Cam Harvey, Bruno Biais. Simon Gervais, participants at the Western Finance Association Meeting, NBER Market Microstructure Meeting, Centre for Economic Policy Research Meeting. Q-Group Seminar, Whart The fash cash high frequency trading in an electronic market on Conference in Honor of Marshall Blume, Princeton University Quant Trading Conference, University of Chicago Conference on Market Microstructure andThe fash cash high frequency trading in an electronic market
High-Frequency Data. NYL'-Courant Mathematical Finance Seminar, Columbia Conference on Quantitative Trading and Asset Management, and seminar particiThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market University of Maryland. Bank for International Settlements. Commodity Futures lYading Commission, Federal Reserve Board, and the International Monetary' Find, among others. The research presented in this paper was coauthored by Andrei Kirilenko, a former full-time CFTC employee, Albert Kyle, a form The fash cash high frequency trading in an electronic market er CFTC contractor who performed work under CFTC OCE contract (CFCE-09-CO-0117), Mehrdad Samadi, a former full-time CFTC employee and former CFTC contThe fash cash high frequency trading in an electronic market
ractor who performed work under CFTC OCE contracts (CFCE-1 l-CO-0122 and CFCE-13-CO-0061), and Tugkan Tuzun. a former CFTC contractor who performed woThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market pics relevant to the CFTC's mandate to regulate commodity futures markets and commodity options markets, and its expanded mandate to regulate the swaps markets pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act. The analyses and conclusions expressed in this paper are those of The fash cash high frequency trading in an electronic market the authors and do not reflect the views of the Federal Reserve System, the members of the Office of the Chief Economist, other CFTC staff, or the CFThe fash cash high frequency trading in an electronic market
TC itself. The Appendix can be found in the online version of the article on the Journal of finance website.Electronic copy available at: https://ssrnThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market int report describes the Flash Crash as follows:“At 2:32 |CT| p.m., against |a| hackdrop of unusually high volatility and thinning liquidity, a Luge funchuneulal trader (a mutual fund complex) initialed a sell program to sell a total of 75.000 E-mini [s&p 500 futures] contracts (valued at approximat The fash cash high frequency trading in an electronic market ely S-l.l billion) as a hedge to an existing equity position. [... ] This Luge fimdiimculal trader chose to execute this sell program via an automatedThe fash cash high frequency trading in an electronic market
execution algorithm (“Sell Algorithm") that was programmed to feed orders into the June 2010 E-mini marker to target an execution rate set to 9% of tThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market net change in daily position of any trader in the E-mini since rhe beginning of rhe year (from January 1, 2010 through May 6. 2010). [...] This sell pressing was initially absorbed by: high frequency traders (“HFTs”) and other intermediaries in the futures market; fundamental buyers in the futures The fash cash high frequency trading in an electronic market market ; and cross-market arbitrageurs who transferred this sell pressure to the equities markets by opportunistically buying E-mini contracts and simThe fash cash high frequency trading in an electronic market
ultaneously selling products like [the] SPY [(S&p 500 exchange-trailed fund (“ETF”))], or selling individual equities in the s&p 500 Index. [...] BetwThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market $1.9 billion) of the 75.000 intended. [...] By 2:45:28 there were less than 1,050 contracts of buy-side resting orders in the E-mini, representing less than 1% of buy-side market depth observed at the beginning of the day. [...] At 2:45:28 p.m., trading on the E-mini was paused for five seconds whe The fash cash high frequency trading in an electronic market n the Chicago Mercantile Exchange (“CME”) Stop Logic Functionality was triggered in order to prevent a cascade of further price declines.* [...] WhenThe fash cash high frequency trading in an electronic market
trading resumed at 2:15:33 p.m., prices stabilized and shortly thereafter, the E-mini began to recover, followed by the SPY. (... ] Even though after The Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market many retail stop-loss orders, triggered by declines in prices of those securities) found reduced*The CME’s Globex Slop Logic Functionality is an automated pre-trade safeguard procedure designed to prevent the execution of cascading slop orders that would cause “excessive” declines or increases in p The fash cash high frequency trading in an electronic market rices due to lack of sufficient depth in the central limit order book. In the context of this functionality,“excessive” is defined as being outside ofThe fash cash high frequency trading in an electronic market
a predetermined “no bust” range. The no bust range varies from contract to contract; for rhe E-mini, it was set at 6 index points (21 ticks) in eitheThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market lled a “reserve stale.” The length of the trading pause varies between 5 and 20 seconds from contract to contract; it was set at 5 seconds for the E-mini. Daring the reserve Stille, orders can be submitted, modified, or cancelled, but no executions can lake place. The matching engine exits the reser The fash cash high frequency trading in an electronic market ve state by initiating the same auction opening procedure as it does at the beginning of each trading day. After lhe stinting price is determined by tThe fash cash high frequency trading in an electronic market
he re-opening auction, the matching engine returns to the standind continuous matching protocol.2Electronic copy available at: https://ssrn.com/abstraThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market based on retail-customer orders) across more than 300 separate securities, including many RTFs, were executed at prices 60% or more away from their 2:40 p.m. prices. |...| By 3:08 p.m., |...| the E-mini prices |were| back to nearly iheữ prc-drup level [... and] must sectuities had reverted back to t The fash cash high frequency trading in an electronic market rading al prices relleuling true con.scn.siis values.”To illustrate the large and temporary decline in prices and the corresponding increase in tradinThe fash cash high frequency trading in an electronic market
g volume on May 6, Figure 1 presents end-of-minute transaction prices (solid line) and minute-by-minute trading volume (dashed line) in the E-mini on The Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market of as a period of largo and temporary selling pressure. Theory suggests that a period of large and temporary selling pressure can trigger a market crash even in the absence of a fundamental shock. Building on the Grossman and Miller (1988) framework. Huang and Wang (2008) develop an equilibrium mod The fash cash high frequency trading in an electronic market el that links the cost of maintaining continuous market presence with market crashes even in the abeeuce of fundament al shocks and wit h perfectly ofThe fash cash high frequency trading in an electronic market
fsett ing idiosyncratic shocks. In t heir model, market crashes emerge endogenously when a sudden excess of Si'll orders overwhelms the insufficient rThe Flash Crash: High-Frequency Trading in an Electronic MarketANDREI KIRILENKO. ALBERT s. KYLE. MEHRDAD SAMADI. and TUGKAN TUZL’N*ABSTRACTWe study in The fash cash high frequency trading in an electronic market sk exposures that are too low to offset large but temporary liquidity imbalances. In the event of a large enough sell order, the liquidity on the buy side can only be obtained after a price drop that is large enough to compensate increasingly reluctant marker makers for taking on additional risky in The fash cash high frequency trading in an electronic market ventory.Weill (2007) presents an equilibrium model of optimal dynamic inventory adjustment of competitive capita(-constrained intermediaries faced witThe fash cash high frequency trading in an electronic market
h large and temporary soiling3Electronic copy available at: https://ssm com/abstract=1686004pressure. This framework begins with an exogenous negativeGọi ngay
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