Albert J. Menkveld, Bart Zhou Yueshen
A breakdown of cross-market arbitrage activity could make markets more fragile and result in price crashes. We provide suggestive evidence for this novel channel based on a high-frequency analysis of the most salient crash in recent history: The Flash Crash. We further show that such an event can be extremely costly for a large seller trading in a particular venue as the seller effectively relies on local liquidity supply only. These findings highlight the vulnerability of today’s highly fragmented markets. © 2018 INFORMS.
VU University Amsterdam, Tinbergen Institute, Duisenberg School of Finance, FEWEB, Amsterdam, 1081 HV, Netherlands; INSEAD, 138676, Singapore
