High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?

Bellia, Mario; Christensen, Kim; Kolokolov, Aleksey; Pelizzon, Loriana; Renò, Roberto

doi:10.2139/ssrn.3560238

Cited by 8 publications

(3 citation statements)

References 32 publications

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“…In the present section, we examine the effect of the NVAT on market quality in extreme market events, such as flash crashes and bubbles. In accordance with Bellia et al (2018), we identify a mini-bubble (crash) as a strong and rapid price increase (drop), at least by 1.5% of the initial level, followed by a violent burst (recovery), within at most 12 minutes (24 rounds in our simulations). To be identified as a bubble (crash), the log price should retrace at least one-third of its initial rise (decline) within the above-mentioned time window.…”

Section: Extreme Price Movementssupporting

confidence: 83%

Non-Value-Added Tax to improve market fairness and quality

2022

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The promotion of both market fairness and efficiency has long been a goal of securities market regulators worldwide. Accelerated digital disruption and abusive trading behaviors, such as the GameStop mania, prompt regulatory changes. It is unclear how this “democratization” of trading power affects market fairness as economies cope with pandemic-driven shifts in basic systems. Excessive speculation and market manipulation undermine the quality of financial markets in the sense that they cause volatility and increase the pain of bubble and crash events. Thereby, they weaken public confidence in financial markets to fulfill their roles in proper capital allocation to irrigate the real economy and generate value for society. While previous studies have mostly focused on market efficiency, our study proposes a tool to improve market fairness, even under periods of stress. To encourage value generation and improve market quality, we advance a graduated Non-Value-Added Tax that we implement in an agent-based model that can realistically capture the properties of real-world financial markets. A profitable transaction is taxed at a higher rate if it does not enhance the efficiency measured by deviation from fundamentals. When an agent locks in profit not supported by fundamentals but driven by trend-following strategies, the generated profit is taxed at various rates under the Non-Value-Added Tax regime. Unlike existing financial transaction taxes, the non-value-added tax is levied on profit rather than on price or volume. We show that the proposed tax encourages profitable trades that add value to the market and discourages valueless profit-making. It significantly curtails volatility and prevents the occurrence of extreme market events, such as bubbles and crashes.

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Section: Extreme Price Movementssupporting

confidence: 83%

Non-Value-Added Tax to improve market fairness and quality

2022

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“…The famous flash crash of May 6, 2010, has received a lot of attention in the literature; see, for example, Kirilenko et al (2017). Bellia et al (2020) analyze the relationships between high-frequency trading, herding, and flash crashes. Brewer et al (2013) analyze through simulation five different circuit breakers and their effects on market failures and crashes.…”

Section: Future Research Directionsmentioning

confidence: 99%

Frontiers in Service Science: Fintech Operations—An Overview of Recent Developments and Future Research Directions

Hao

Pinedo

et al. 2021

Service Science

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In this paper, we provide a survey of recent developments in the fintech (financial technology) industry, focusing on the operational structures, the technologies involved, and the operational risks associated with the new systems. In particular, we discuss payment systems, algorithmic trading, robo-advisory, crowdfunding, and peer-to-peer lending. In the conclusion section, we discuss various promising research directions.

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“…We identify crashes using two methods, both of which identify essentially the same crashes. First, we use the drift-burst statistics developed by Christensen, Oomen, and Renò (2016) and also used by Bellia, Christensen, Kolokolov, Pelizzon, and Renò (2018):…”

Section: A Identification Of the Crashesmentioning

confidence: 99%

Liquidity Provision: Normal Times vs Crashes

Jagannathan,

Pelizzon,

Schaumburg

et al. 2019

SSRN Journal

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High-Frequency Trading During Flash Crashes: Walk of Fame or Hall of Shame?

Cited by 8 publications

References 32 publications

Non-Value-Added Tax to improve market fairness and quality

Non-Value-Added Tax to improve market fairness and quality

Frontiers in Service Science: Fintech Operations—An Overview of Recent Developments and Future Research Directions

Liquidity Provision: Normal Times vs Crashes

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