The Flash Crash: The Impact of High Frequency Trading on an Electronic Market Andrei Kirilenko Commodity Futures Trading Commission joint with Pete Kyle (Maryland), Mehrdad Samadi (CFTC) and Tugkan Tuzun (Maryland and CFTC) This presenta>on and the views presented here represent only our views and do not necessarily represent the views of the Commission, Commissioners or staff of the Commodity Futures Trading Commission.
The Flash Crash - May 6, 2010 11,000 1,180 10,800 1,160 1,140 10,600 1,120 DJIA 10,400 1,100 S&P 500 10,200 10,000 DJIA E-Mini S&P 500 S&P 500 Index 1,080 1,060 1,040 9,800 8:30 9:20 10:10 11:00 11:50 12:40 13:30 14:20 Time 1,020
What did people think? A survey conducted by Market Strategies International in June 2010 reports that over 80 percent of U.S. retail advisors believe that overreliance on computer systems and high-frequency trading were the primary contributors to the volatility observed on May 6.
This paper We use audit-trail data for the E-mini S&P 500 stock index futures contract to answer three questions: How did High Frequency Traders and others traded on May 6? What may have triggered the Flash Crash? What role did High Frequency Traders play in the Flash Crash?
Findings High Frequency Traders did not cause the Flash Crash. On May 6, HFTs traded the same way as they did on May 3-5: Small inventory, high trading volume, take more liquidity than provide. A large, but short lived imbalance between Fundamental Sellers and Fundamental Buyers appeared. Opportunistic Traders held it, but for a massive price concession. Fundamental Buyers eventually stepped in and pushed prices up.
E- mini S&P 500 futures contract Trades exclusively on the CME Globex electronic trading platform. Highest dollar trading volume among U.S. equity index products. Contributes the most to price discovery of the S&P 500 index: Hasbrouck (2003). Price discovery typically occurs in the front-month contract.
June 2010 E- mini S&P 500: Trading Volume and Price 90000 1180 80000 1160 70000 Volume Price 1140 60000 1120 Volume 50000 40000 1100 Price 30000 1080 20000 1060 10000 1040 0 1020 8:30 9:20 10:10 11:00 11:50 12:40 13:30 14:20 15:10 Time
Summary Sta>s>cs
Trader Categories High Frequency Traders (16) Intermediaries (179) Fundamental Buyers (1263) Fundamental Sellers (1276) Opportunis>c Traders (5808) Small Traders (Noise) (6880)
7.00% Trader Categories 7.00% 6.00% 6.00% 5.00% HFT 5.00% HFT % of Volume 4.00% 3.00% % of Trades 4.00% 3.00% Opp 2.00% 1.00% Int Opp Fundamental Noise 2.00% 1.00% Int Fundamental Noise 0.00% 0 5000 10000 15000 20000 Rank 0.00% 0 5000 10000 15000 20000 Rank
Trader Volume 700000 600000 500000 400000 300000 200000 100000 700000 600000 500000 Trader Volume May 3 Trader Categories High Frequency Traders Opportunistic Traders and Intermediaries Trader Volume 700000 600000 500000 400000 300000 200000 100000 May 4 High Frequency Traders Opportunistic Traders and Intermediaries 0 Fundamental Sellers Fundamental Buyers 0 Fundamental Sellers Fundamental Buyers -0.00736-0.00536-0.00336-0.00136 0.00064 0.00264 0.00464 0.00664-0.00736-0.00536-0.00336-0.00136 0.00064 0.00264 0.00464 0.00664 May 5 600000 High Frequency Traders 500000 High Frequency Traders 400000 300000 300000 200000 200000 Opportunistic Traders and Intermediaries 100000 Opportunistic Traders and Intermediaries 100000 Fundamental Sellers Fundamental Buyers 0 Fundamental Sellers Fundamental Buyers 0-0.00736-0.00536-0.00336-0.00136 0.00064 0.00264 0.00464 0.00664-0.00736-0.00536-0.00336-0.00136 0.00064 0.00264 0.00464 0.00664 Net Position Scaled by Market Trading Volume Trader Volume 700000 400000 May 6
Trader Category Summary Sta>s>cs 16 HFT accounts are responsible for almost a third of trading volume
Net Posi>on 2500 1205 2000 May 3 1500 1200 1000 500 0 1195-500 - 1000 1190-1500 - 2000 1185-2500 HFT NP - 3000 Price 1180 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 Time 5000 4000 3000 2000 1000 0-1000 - 2000-3000 - 4000 May 5 Net Holdings of High Frequency Traders 1175 1170 1165 1160 1155 1150-5000 1145 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 4000 3000 2000 1000 0-1000 - 2000-3000 May 4 1185 1180 1175 1170 1165 1160-4000 1155 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 4000 3000 2000 1000 0-1000 - 2000-3000 - 4000 May 6 1180 1160 1140 1120 1100 1080 1060-5000 1040 m>me 9:20 10:10 11:00 11:50 12:40 13:30 14:20 15:10 Yet they do not accumulate of position larger than 4500 contracts!
Net Posi>on Net Holdings of Intermediaries 1500 1205 1500 1185 May 3 May 4 1000 1000 1200 1180 500 500 0 1195 0 1175 1170-500 1190-500 INT NP - 1000 1165 Price - 1000 1185-1500 - 1500 1160-2000 1180 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11-2000 1155 Time 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 2000 1500 1000 500 0-500 May 5 1175 2000 1170 1500 1000 1165 500 1160 0 1155-500 May 6 1180 1160 1140 1120 1100 1080-1000 1150-1000 1060-1500 1145 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11-1500 1040 m>me 9:20 10:10 11:00 11:50 12:40 13:30 14:20 15:10
HFTs: Net Holdings and Prices May 3-5 HFTs reduce 0.6 percent of their net holdings in 1 second. HFTs trade in the direc>on of the price movement for the first 5 seconds. Trade in the direc>on opposite the price movement a^er 10 seconds. Interpreta>on: Speed or predic>ve ability enables HFTs to buy right when prices are about to increase and sell a^er the prices rose.
HFTs: Net Holdings and Prices May 6 HFTs trade in the direc>on of the price movement for the first 2 seconds. Trade in the direc>on opposite the price movement a^er 4 seconds. On May 6, HFTs reverse the direc>on of their trading a lot faster Follow the same strategy, but do it faster
May 3-5 Intermediaries: Net Holdings and Prices Intermediaries reduce 0.4 percent of their net holdings in 1 second. Intermediaries trade opposite the price movement for the first 2 seconds. Trade in the same direc>on as price a^er 3 seconds. May 6 Intermediaries trade opposite the price movement contemporaneously. Reverse the direc>on of trade at lags 1 through 4. Intermediaries get run over by the price move.
$800,000 $600,000 $400,000 $200,000 HFT PL Profits and Losses of High Frequency Traders May 3 1205 1200 1195 1190 1185 $0 1180 8:31 9:21 10:11 11:0111:5112:4113:3114:2115:11 $2,500,000 $2,000,000 $1,500,000 $1,000,000 $500,000 May 4 1185 1180 1175 1170 1165 1160 $0 1155 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 $1,200,000 $1,000,000 $800,000 $600,000 $400,000 $200,000 $0 May 5 1175 1170 1165 1160 1155 1150 $6,000,000 $5,000,000 $4,000,000 $3,000,000 $2,000,000 $1,000,000 May 6 1200 1150 1100 1050 -$200,000 1145 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 $0 1000 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 Never negative.
$250,000 $200,000 $150,000 $100,000 $50,000 $0 Profits and Losses of Intermediaries 1205 $500,000 May 3 May 4 INT PL 1200 1195 1190 1185 $400,000 $300,000 $200,000 $100,000 $0 1185 1180 1175 1170 1165 1160 -$50,000 1180 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 $300,000 $250,000 $200,000 $150,000 $100,000 $50,000 $0 -$50,000 May 5 1175 1170 1165 1160 1155 1150 -$100,000 1145 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 -$100,000 1155 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11 $1,000,000 $500,000 $0 -$500,000 -$1,000,000 -$1,500,000 -$2,000,000 -$2,500,000 -$3,000,000 May 6 1180 1160 1140 1120 1100 1080 1060 1040 -$3,500,000 1020 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11
HFTs: Liquidity Provision (Passive) or Removal (Aggressive) May 3-5 Aggressively reduce 0.5 percent of their net holdings in 1 second. Aggressively trade in the direc>on of the price movement for the first 6 seconds. Aggressively trade in the direc>on opposite the price movement a^er 10 seconds. Passively provide liquidity at all lags, but with smaller coefficients May 6 Same strategy, but faster HFTs more aggressively remove liquidity, then passively supply it
Intermediaries: Liquidity Provision (Passive) or Removal (Aggressive) May 3-5 Aggressively reduce 0.2 percent of their net holdings in 1 second. Aggressively trade in the direc>on of the price movement for the first 12 seconds. Passively provide liquidity at all lags, and with larger coefficients May 6 Smaller coefficients Intermediaries provide liquidity; did less of it on May 6
HFTs and Intermediaries: The Flash Crash DOWN (13:32:00-13:45:28 CT) HFTs follow the same strategy Intermediaries get caught on the wrong side UP (13:45:33-14:08:00 CT) HFTs are less aggressive (fundamental and opportunis>c buyers are) Intermediaries close posi>ons and about half of them withdraw
Fundamental Traders
Fundamental Traders: Flash Crash
25000 Opportunistic Traders: Flash Crash 1140 20000 15000 1120 Net Position Change 10000 5000 0-5000 -10000 1100 1080 1060 Price -15000-20000 Opportunistic Fundamental Sellers Fundamental Buyers Price 1040-25000 1020 13:19 13:29 13:39 Time 13:49 13:59 14:09
100000 Cumulative Aggressiveness Imbalance 1180 50000 1160 1140 0 1120 Imbalance -50000 1100 1080 Price -100000 Aggressiveness Imbalance 1060 1040-150000 1020 8:30 9:20 10:10 11:00 11:50 12:40 13:30 14:20 15:10
Aggressiveness Imbalance: HFTs 5000 HFT Buy Imbalance HFT Sell Imbalance neg Piont 4000 1160 3000 2000 1140 Imbalance 1000 0-1000 1120 1100 Price -2000-3000 1080-4000 1060 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11
Aggressiveness Imbalance: Intermediaries 1000 INT Buy Imbalance INT Sell Imbalance neg Piont 1160 500 1140 Imbalance 0-500 1120 1100 Price -1000 1080-1500 1060 8:31 9:21 10:11 11:01 11:51 12:41 13:31 14:21 15:11
Prices and Aggressiveness Imbalance 1160 1140 Price 1120 1100 1080 Price Estimated Price 1060 8:32 9:22 10:12 11:02 11:52 12:42 13:32 14:22 15:12
Prices and Aggressiveness Imbalance: Regressions
The Flash Crash 13:32 A large fundamental seller ini>ates a sell program 13:42 HFTs reverse the direc>on of their trading (start selling) 13:45 Hot Potato : Lack of Fundamental and Opportunis>c Buyers 13:45:28-13:45:33 5 second trading pause 13: 45:33 13:45:58 Prices stabilize 13:46 Fundamental Buyers li^ prices up 14:08 Prices are at the 13:32 level
The Flash Crash: CFTC-SEC Report Large Fundamental Seller hedges exposure in equi>es Sell Algorithm sell 75,000 E- mini s with 9% volume par>cipa>on target Size Largest net posi>on of the year executed in about 20 minutes Price Decline sells 35,000 ($1.9 billion) contracts in 13 minutes Cross- Market Arbitrage buy E- mini/sell SPY or basket of equi>es Across the Board Price Declines trigger automated pauses Lack of Liquidity in Individual Equi>es systems reset to reflect higher risk Broken Trades retail stop loss orders executed against stub quotes
Conclusions A large trade will always have an impact and may trigger a cascade Volume is really not the same as liquidity HFTs did not cause the Flash Crash, HFTS are not liquidity providers Questions Fundamental Buyers why did it take so long? How did the 5-second pause work? More safeguards needed to prevent cascades. How dumb/smart?
The CFTC-SEC Joint Advisory Committee on Emerging Regulatory Issues Recommendations Regarding Regulatory Responses to the Market Events of May 6, 2011 Summary Report presented at the public meeting on February 18, 2011 I. Dealing with volatility in individual instruments: single stock pauses/circuit breakers; minimum quoting requirements for securities; limit up/limit down for securities; enhancements to pre-trade risk safeguards/pauses for the futures. II. Dealing with market-wide volatility: market-wide circuit breakers: use S&P 500; start at 10 percent; pause for as low as 10 minutes; go as late as 3:30 p.m.
The CFTC-SEC Joint Advisory Committee (continued) III. Restrictions on co-location/access/disruptive trading practices: support the SEC s naked access rulemaking; support the CFTC s disruptive trading rulemaking; look into restrictions on the executions of large orders. IV. Liquidity Enhancements: peak load pricing; reasonably related market making quotes ; trade at rule for routers/internalizers; order cancellation fees; reporting new measures of liquidity. V. Regulators Access to Information: consolidated audit trail for the SEC; order book and ownership data for the CFTC.