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| Type | Bachelor's Thesis |
| Scope | Discipline-based scholarship |
| Title | The different theories of the 2010 Flash Crash with main focus on high-frequency trading |
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| Institution | University of Zurich |
| Faculty | Faculty of Business, Economics and Informatics |
| Number of Pages | 61 |
| Date | 2017 |
| Zusammenfassung | This paper investigates the plausibility of different theories of the “Flash Crash” on May 6, 2010, when the Dow Jones Industrial Average experienced its biggest intraday drop, before rebounding within few minutes. It is based on the official report of the U.S. Securities and Exchange Commission (SEC) and the U.S. Commodities Futures Trading Commission (CFTC), which concludes, that mainly an erroneous sell algorithm issued by a large fundamental trader is mainly responsible for the market crash. Their claim was proven to be partially flawed and thus, further investigation was needed. Firstly, early emerged theories are analyzed and inter alia proven untrue. The paper’s primary focus lies on studies conducted by academic and independent researchers, trying to explain the cause of the “Flash Crash” and their criticism towards the official explanation by the SEC and CFTC. Furthermore, the regulators’ claim, whether Navinder Sarao singlehandedly was significantly responsible for triggering the “Flash Crash”, is studied. The results show, that he may is guilty of using manipulative trading strategies, but not for causing the “Flash Crash”. Chapter 4 compares the different theories about the “Flash Crash” and judges its plausibility. In conclusion, the market events of May 6th were a result of the interplay of uncertain market conditions, episodic illiquidity, reporting delays, broken cross-market arbitrage and extraordinary selling pressure. Newer theories are typically more credible, mainly due to the extensive data basis recent studies rely on and previous findings they can build upon. The next section concentrates on the role of high-frequency traders (HFTs) in the market crash. It provides the reader with a general introduction about high-frequency trading and their most frequently used legal and illegal trading strategies. A comparison of benefits and drawbacks of HFTs for the market stability and overall welfare of market participants is conducted, whereas the negative arguments prevail significantly. Chapter 6 focuses on the implemented and currently planned regulatory changes in response of the “Flash Crash” to prevent a repetition of this occurrence. Subsequently, a summary of suggested regulations by academics in order to stabilize the markets and inhibit illegal/unethical high-frequency trading techniques is composed. The last part studies legal actions and detection methods against the manipulative strategy “spoofing”, which is often used by HFTs for the purpose of disrupting market prices in their favor. Further, it discusses the support of third parties for regulators in detecting spoofing activities and provides suggestions for more effective spoofing prevention and detection on an automated basis. This could be achieved by more efficient data collection, improved coordination of market regulators and exchanges and automated pattern recognition. |
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