The Microstructure of the Flash Crash Flow Toxicity, Liquidity Crashes and the Probability of Informed Trading英文资料.pdf

The Microstructure of the Flash Crash Flow Toxicity, Liquidity Crashes and the Probability of Informed Trading英文资料.pdf

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THE MICROSTRUCTURE OF THE ‘FLASH CRASH’ Flow toxicity, liquidity crashes and the Probability of Informed Trading David Easley Marcos M. López de Prado Maureen O’Hara dae3@ marcos.lopezdeprado@ mo19@ November 19th, 2010 ABSTRACT The ‘flash crash’ of May 6th 2010 was the second largest point swing (1,010.14 points) and the biggest one-day point decline (998.5 points) in the history of the Dow Jones Industrial Average. For a few minutes, $1 trillion in market value vanished. In this paper, we argue that the ‘flash crash’ is the result of the new dynamics at play in the current market structure. We highlight the role played by order toxicity in affecting liquidity provision, and we show that a measure of this toxicity, the Volume- Synchronized Probability of Informed Trading (VPIN)*, captures the increasing toxicity of the order flow in the hours and days prior to collapse. Since the ‘flash crash’ might have been avoided had liquidity providers remained in the marketplace, a solution is proposed in the form of a ‘VPIN contract’ which would allow them to dynamically monitor and manage their risks. Keywords: Flash crash, liquidity, flow toxicity, market microstructure, probability of informed trading, VPIN. JEL codes: C02, D52, D53, G14. David Easley is the Scarborough Professor and Donald C. Opatrny Chair Department of Economics, Cornell University; Marcos M. López de Prado is Head of High Frequency Futures, Tudor Investment Corp. and Fellow at RCC, Harvard University; and Maureen O’Hara is the Robert W. Purcell Professor of Finance, Cornell University. We thank seminar participants at Cornell University and the FINRA Economic Advisory Board for help

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