Tugkan Tuzun

The Flash Crash: High-Frequency Trading in an Electronic Market

We study intraday market intermediation in an electronic market before and during a period of large and temporary selling pressure. On May 6, 2010, U.S. financial markets experienced a systemic intraday event, known as the Flash Crash, when a large automated sell program was rapidly executed in the E-mini S&P 500 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 pattern of the most active non-designated intraday intermediaries (classified as High Frequency Traders) did not change when prices fell during the Flash Crash.

Are Leveraged and Inverse ETFs the New Portfolio Insurers

This paper studies Leveraged and Inverse Exchange Traded Funds (LETFs) from a financial stability perspective. Mechanical positive-feedback rebalancing of LETFs resembles the portfolio insurance strategies, which contributed to the stock market crash of October 19, 1987 (Brady Report, 1988). I show that a 1% increase in broad stock-market indexes induces LETFs to originate rebalancing flows equivalent to

Trading Game Invariance in the TAQ Dataset

1.04 billion worth of stock. Price-insensitive and concentrated trading of LETFs results in price reaction and extra volatility in underlying stocks. Implied price impact calculations and empirical results suggest that they contributed to the stock market volatility in the 2008-2009 financial crisis and in the second half of 2011 when the European sovereign debt crisis came to the forefront. Although LETFs are not as large as portfolio insurers of the 1980s and have not been proven to disrupt stock market activity, their large and concentrated trading could be destabilizing during periods of high volatility.

Automation, Intermediation and the Flash Crash

The trading game invariance hypothesis of Kyle and Obizhaeva (2011a) is tested using the Trades and Quotes (“TAQ”) dataset. Over the period 1993-2001, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity has an almost constant value of 0.690, slightly higher than the value of 2/3 predicted by the invariance hypotheses. Over the period 2001-2008, the coefficient estimates rise almost linearly, with an average value of 0.787. Average trade size, normalized for trading activity, falls dramatically over the period 1993-2008. The distribution of trade size adjusted for trading activity resembles a log-normal more closely in 1993 than in 2001 or 2008, with truncation below the 100-share odd-lot boundary becoming a more prominent feature over time. These results suggests that the 2001 reduction in minimum tick size to one cent and the subsequent increase in algorithmic trading have resulted in more intense order shredding in actively traded stocks than inactively traded stocks. The invariance hypothesis explains 91% of the cross-sectional variation in print arrival rates and average print size.

Trader Positions and Marketwide Liquidity Demand

The Flash Crash of May 6, 2010, shook the confidence of market participants and raised questions about the market structure of electronic markets. In these markets, intraday intermediation has been increasingly provided by market participants without formal obligations to do so. We examine intraday intermediation in the E-mini S&P 500 stock index futures market before and during the Flash Crash. We discuss the evolution of trading from human to electronic environments and the implications of our results for market design.

Microstructure Invariance in U.S. Stock Market Trades

In electronic, liquid markets, traders frequently change their positions. The distribution of these trader position changes carries important information about liquidity demand in the market. From this distribution of trader position-changes, we construct a marketwide measure for intraday liquidity demand that does not necessarily depend on aggressive trading. Using a rich regulatory dataset on S&P 500 E-mini futures and 10-year Treasury futures markets, we show that this liquidity demand measure has a positive impact on prices. We then decompose our measure of liquidity demand into three components: aggressive, passive and mixed liquidity demand. Passive liquidity demand also has an impact on prices; a one standard deviation increase in passive liquidity demand is associated with 0.5 tick rise in prices for S&P 500 E-mini futures. In addition, we find that new information is incorporated into the prices when passive liquidity demanders take positions. By providing direct evidence, we contribute to the growing literature on the impact of passive limit orders.

The Flash Crash: The Impact of High Frequency Trading on an Electronic Market

This paper studies invariance relationships in tick-by-tick transaction data in the U.S. stock market. Over the 1993?2001 period, the estimated monthly regression coefficients of the log of trade arrival rate on the log of trading activity have an almost constant value of 0.666, strikingly close to the value of 2/3 predicted by the invariance hypothesis. Over the 2001?14 period, the estimated coefficients rise, and their average value is equal to 0.79, suggesting that the reduction in tick size in 2001 and the subsequent increase in algorithmic trading resulted in a more intense order shredding in more liquid stocks. The distributions of trade sizes, adjusted for differences in trading activity, resemble a log-normal before 2001; there is clearly visible truncation at the round-lot boundary and clustering of trades at even levels. These distributions change dramatically over the 2001?14 period with their means shifting downward. The invariance hypothesis explains about 88 percent of the cross-sectional variation in trade arrival rates and average trade sizes; additional explanatory variables include the invariance-implied measure of effective price volatility.