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Heterogeneous Criticality in High Frequency Finance: A Phase Transition in Flash Crashes
Jeremy D Turiel1, Tomaso Aste2
1Department of Computer Science, University College London, Gower Street, London WC1E 6BT, UK.
Entropy (Basel, Switzerland)
|February 25, 2022
Summary
Large financial market flash crashes are systemic, unlike smaller ones. A phase transition reveals that liquid stocks dominate large co-crashes, suggesting liquidity shifts trigger systemic risk in high-frequency trading.
Area of Science:
- Quantitative Finance
- Market Microstructure
- Financial Econometrics
Background:
- Flash crashes are significant events in modern financial markets.
- Systemic risk and shock propagation are critical concerns for regulators and market participants.
- High-frequency trading (HFT) plays a crucial role in market dynamics.
Purpose of the Study:
- To investigate the systemic risk structure of co-crashes in high-frequency trading.
- To differentiate between small and large co-crash events.
- To understand the role of liquidity and stock characteristics in co-crash dynamics.
Main Methods:
- Analysis of co-crash events in financial markets.
- Identification of a phase transition based on co-crash size.
- Examination of stock liquidity and centrality in co-crash networks.
Main Results:
- Large co-crashes exhibit systemic properties, distinct from small co-crashes.
- A phase transition occurs between small and large co-crashes.
- Small co-crashes primarily involve illiquid stocks, while large co-crashes are dominated by liquid, central stocks.
Conclusions:
- Systemic effects and shock propagation in financial markets may be driven by liquidity dynamics.
- Simultaneous liquidity withdrawals by high-frequency traders and market makers can trigger large co-crashes.
- Understanding these dynamics is crucial for mitigating systemic risk.
Keywords:
criticalityfinancial networksflash crashhigh frequency tradingmarket microstructurephase transitionsystemic riskMore Related Videos
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