Economics, Econometrics and Finance
4 years ago

Market Crash Prevention: New Contract Saves Trillions in Vanishing Value

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The Journal of Portfolio Management
The Microstructure of the “Flash Crash”: <i>Flow Toxicity, Liquidity Crashes, and the Probability of Informed Trading</i>
David Easley, Marcos López de Prado, Maureen O’Hara

Paper Summary

The flash crash of May 6, 2010, was a major event in the stock market where $1 trillion disappeared in minutes. The crash happened because of new dynamics in the market structure. Order toxicity affected liquidity provision, leading to the crash. A measure called VPIN showed increasing order toxicity before the crash. If liquidity providers had stayed in the market, the crash might have been avoided. A solution proposed is a VPIN contract to help manage risks.

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