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The Flash Crash: Trading Aggressiveness, Liquidity Supply, and the Impact of Intermarket Sweep Orders

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  • Tom McInish
  • James Upson
  • Robert A. Wood

Abstract

During the Flash Crash on May 6, 2010, a short period of high stock market volatility, some stock prices declined to $0.01, while others increased to $100,000. Examining Intermarket Sweep Orders (ISOs) before, on, and after May 6, we find that ISO use is substantially higher on May 6. For those stocks whose prices fell the most, over 65% of the sell volume comes from ISOs. During the price recovery period for these stocks, about 53% of the buy volume comes from ISOs. We believe that the unusual behavior of ISOs contributed to the sudden drop and recovery of the market.

Suggested Citation

  • Tom McInish & James Upson & Robert A. Wood, 2014. "The Flash Crash: Trading Aggressiveness, Liquidity Supply, and the Impact of Intermarket Sweep Orders," The Financial Review, Eastern Finance Association, vol. 49(3), pages 481-509, August.
    • Handle: RePEc:bla:finrev:v:49:y:2014:i:3:p:481-509
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    Citations

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    Cited by:

    1. Miles Kellerman, 2021. "Market structure and disempowering regulatory intermediaries: Insights from U.S. trade surveillance," Regulation & Governance, John Wiley & Sons, vol. 15(4), pages 1350-1369, October.
    2. Nathalie Oriol & Iryna Veryzhenko, 2019. "Market structure or traders' behavior? A multi agent model to assess flash crash phenomena and their regulation," Quantitative Finance, Taylor & Francis Journals, vol. 19(7), pages 1075-1092, July.
    3. Khaladdin Rzayev & Gbenga Ibikunle, 2021. "Order aggressiveness and flash crashes," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 26(2), pages 2647-2673, April.
    4. Manahov, Viktor, 2016. "A note on the relationship between high-frequency trading and latency arbitrage," International Review of Financial Analysis, Elsevier, vol. 47(C), pages 281-296.
    5. Floris Laly & Mikael Petitjean, 2020. "Mini flash crashes: Review, taxonomy and policy responses," Bulletin of Economic Research, Wiley Blackwell, vol. 72(3), pages 251-271, July.
    6. Demirer, Rıza & Leggio, Karyl B. & Lien, Donald, 2019. "Herding and flash events: Evidence from the 2010 Flash Crash," Finance Research Letters, Elsevier, vol. 31(C).
    7. Justin Cox, 2021. "ISO order imbalances and individual stock returns," Journal of Financial Research, Southern Finance Association;Southwestern Finance Association, vol. 44(1), pages 5-23, April.
    8. Upson, James & Van Ness, Robert A., 2017. "Multiple markets, algorithmic trading, and market liquidity," Journal of Financial Markets, Elsevier, vol. 32(C), pages 49-68.
    9. Jurich, Stephen N. & Mishra, Ajay Kumar & Parikh, Bhavik, 2020. "Indecisive algos: Do limit order revisions increase market load?," Journal of Behavioral and Experimental Finance, Elsevier, vol. 28(C).
    10. Klein, Olga, 2020. "Trading aggressiveness and market efficiency," Journal of Financial Markets, Elsevier, vol. 47(C).
    11. Steffen, Viktoria, 2023. "A literature review on extreme price movements with reversal," Journal of Behavioral and Experimental Finance, Elsevier, vol. 38(C).
    12. Allen Carrion & Madhuparna Kolay, 2020. "Trade signing in fast markets," The Financial Review, Eastern Finance Association, vol. 55(3), pages 385-404, August.
    13. Abad, David & Massot, Magdalena & Pascual, Roberto, 2018. "Evaluating VPIN as a trigger for single-stock circuit breakers," Journal of Banking & Finance, Elsevier, vol. 86(C), pages 21-36.

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