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Understanding the Flash Crash – state of the art

Author

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  • Gianluca Piero Maria Virgilio

Abstract

Purpose - The purpose of this paper is to provide the current state of knowledge about the Flash Crash. It has been one of the remarkable events of the decade and its causes are still a matter of debate. Design/methodology/approach - This paper reviews the literature since the early days to most recent findings, and critically compares the most important hypotheses about the possible causes of the crisis. Findings - Among the causes of the Flash Crash, the literature has propsed the following: a large selling program triggering the sales wave, small but not negligible delays suffered by the exchange computers, the micro-structure of the financial markets, the price fall leading to margin cover and forced sales, some types of feedback loops leading to downward price spiral, stop-loss orders coupled with scarce liquidity that triggered price reduction. On its turn leading to further stop-loss activation, the use of Intermarket Sweep Orders, that is, orders that sacrificed search for the best price to speed of execution, and dumb algorithms. Originality/value - The results of the previous section are condensed in a set of policy implications and recommendations.

Suggested Citation

  • Gianluca Piero Maria Virgilio, 2019. "Understanding the Flash Crash – state of the art," Studies in Economics and Finance, Emerald Group Publishing Limited, vol. 36(4), pages 465-491, July.
  • Handle: RePEc:eme:sefpps:sef-07-2018-0223
    DOI: 10.1108/SEF-07-2018-0223
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    More about this item

    Keywords

    Crisis; Volatility; Liquidity; Flash Crash; Forced sales; Stop-loss; G01; N22;
    All these keywords.

    JEL classification:

    • G01 - Financial Economics - - General - - - Financial Crises
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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