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Heterogeneous criticality in high frequency finance: a phase transition in flash crashes

Author

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  • Turiel, Jeremy D.
  • Aste, Tomaso

Abstract

Flash crashes in financial markets have become increasingly important, attracting attention from financial regulators, market makers as well as from the media and the broader audience. Systemic risk and the propagation of shocks in financial markets is also a topic of great relevance that has attracted increasing attention in recent years. In the present work, we bridge the gap between these two topics with an in-depth investigation of the systemic risk structure of co-crashes in high frequency trading. We find that large co-crashes are systemic in their nature and differ from small ones. We demonstrate that there is a phase transition between co-crashes of small and large sizes, where the former involves mostly illiquid stocks, while large and liquid stocks are the most represented and central in the latter. This suggests that systemic effects and shock propagation might be triggered by simultaneous withdrawals or movement of liquidity by HFTs, arbitrageurs and market makers with cross-asset exposures.

Suggested Citation

  • Turiel, Jeremy D. & Aste, Tomaso, 2022. "Heterogeneous criticality in high frequency finance: a phase transition in flash crashes," LSE Research Online Documents on Economics 113892, London School of Economics and Political Science, LSE Library.
  • Handle: RePEc:ehl:lserod:113892
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    File URL: http://eprints.lse.ac.uk/113892/
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    References listed on IDEAS

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    Cited by:

    1. Antonio Briola & Silvia Bartolucci & Tomaso Aste, 2024. "Deep Limit Order Book Forecasting," Papers 2403.09267, arXiv.org, revised Jun 2024.
    2. Vidal-Tomás, David, 2023. "The illusion of the metaverse and meta-economy," International Review of Financial Analysis, Elsevier, vol. 86(C).

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    More about this item

    Keywords

    criticality; financial networks; flash crash; high frequency trading; market microstructure; phase transition; systemic risk; EP/L015129/1; EP/P031730/1; ES/K002309/1; H2020-ICT-2018-2 825215;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • G3 - Financial Economics - - Corporate Finance and Governance

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