High Frequency Trading and Mini Flash Crashes

TL;DR

This paper investigates Mini Flash Crashes in US equity markets during volatile periods, attributing their causes to market regulation and fragmentation, and highlighting their negative effects on liquidity and fleeting liquidity.

Contribution

It identifies regulation and market fragmentation, especially Intermarket Sweep Orders and Regulation NMS, as key causes of Mini Flash Crashes, providing new insights beyond prior research.

Findings

Mini Flash Crashes are linked to regulation and market fragmentation.

They negatively impact market liquidity.

Fleeting Liquidity is associated with these crashes.

Abstract

We analyse all Mini Flash Crashes (or Flash Equity Failures) in the US equity markets in the four most volatile months during 2006-2011. In contrast to previous studies, we find that Mini Flash Crashes are the result of regulation framework and market fragmentation, in particular due to the aggressive use of Intermarket Sweep Orders and Regulation NMS protecting only Top of the Book. We find strong evidence that Mini Flash Crashes have an adverse impact on market liquidity and are associated with Fleeting Liquidity.