High-Frequency Trading and Market Liquidity 

Abstract

On May 6, 2010, major stock indices in the US experienced unprecedented volatility and sharp declines in prices at around 2:32 p.m. The Dow Jones Industrial Average (DJIA) plummeted nearly 1,000 points, or approximately 9%, within minutes, marking one of the largest intraday point declines in its history. Similarly, other major indices, including the S&P 500 and Nasdaq Composite, also experienced significant losses. Following the initial plunge, the market swiftly rebounded, with prices recovering most of their losses within about 36 minutes. By the end of the trading day, the major indices had regained much of their lost ground, though not entirely. This is referred to as The Flash Crash of 2010.   

The Flash Crash was attributed to a confluence of factors, including high-frequency trading (HFT), liquidity imbalance and dry up, fragmented trading venues and the lack of uniform circuit breakers across exchanges; and "mini-flash crashes" occurred in individual stocks and exacerbated market uncertainty.  In the aftermath of the Flash Crash, regulatory authorities, including the U.S. Securities and Exchange Commission (SEC), launched investigations to determine the root causes of the event and identify potential reforms to prevent similar occurrences in the future.  

This lecture will help us to understand market liquidity and how HFT affects market liquidity. Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price, just like popular groceries in a supermarket are readily available on the shelves and easy to purchase. For example, cash is a more liquid, and highly traded stocks are liquid and easy to buy or sell, while real estate is illiquid and difficult to buy or sell. HFT is a form of automated trading using sophisticated algorithms. HFT firms use advanced technology and data analysis to identify and exploit short-term trading opportunities to execute large numbers of orders at extremely high speeds.  It increases trading activity and market efficiency. It may fragment liquidity across different trading platforms, contributing to flash crashes and liquidity shortages during periods of market stress. 

As ordinary investors, we should care about flash crashes because they can have direct and indirect consequences for our investment portfolios, financial well-being, and confidence in the financial system. Understanding the risks associated with flash crashes and staying informed about market developments can help us navigate volatile market conditions and make prudent investment decisions. 

Bio

Tony joined the IBSS Department of Finance as a Professor in Finance in 2022. He had been a Co-Editor of the Journal of Economic Dynamics and Control (an ABDC A* journal) for ten years (2013-2022). He is also a Senior Editor, Department Editor, Associate Editor, and Guest Editor for several other journals in finance and economics. Tony is an internationally recognized expert in asset pricing, financial market modeling, market microstructure, financial economics, and nonlinear dynamics in finance and economics. His international research profile is attested by his publications in finance and economics, invited contributions to the prestigious Handbook of Financial Markets and Handbook of Computational Economics, numerous keynote talks at international conferences, and many competitively Australian and Chinese research grants. Regarding research impact, the RePEc (Research Papers in Economics) Ranking puts Tony in the Top 3% in Asia and China. He has published 1 book, 15 book chapters, and more than 60 papers in journals, including The Journal of Finance, Management Science, Economic Research Journal (经济研究), Journal of Economic Dynamics and Control, Journal of Economic Behaviour and Organization, Macroeconomic Dynamics, and Journal of Banking and Finance. His publications have been cited over 3,600 times in Scopus and 6,000 times in Google Scholar.    

高频交易和市场流动性 

摘要

2010年5月6日，美国主要股指经历了前所未有的波动，价格在下午2: 32急剧下跌。道琼斯工业平均指数（DJIA）在几分钟内暴跌了近1000点，约9％，创下了其历史上最大的日内点数跌幅之一。同样，其他主要指数，包括标准普尔500指数和纳斯达克综合指数，也遭受了重大损失。在最初的暴跌之后，市场迅速反弹，在36分钟内价格恢复了大部分损失。截至交易日结束时，主要指数已经恢复了大部分失地，尽管没有完全恢复。这被称为2010年的闪崩。 

闪崩被归因于多种因素的综合作用，包括高频交易（HFT），流动性失衡和枯竭，碎片化的交易场所和缺乏交易所间统一的熔断机制；以及在个别股票中发生的“微型闪崩”，加剧了市场的不确定性。在闪崩事件之后，包括美国证券交易委员会（SEC）在内的监管机构启动了调查，以确定事件的根本原因，并确定防止类似事件发生的潜在改革措施。 

这次讲座将帮助我们了解市场流动性以及高频交易对市场流动性的影响。流动性指的是一种资产可以在不显著影响其价格的情况下轻易买卖的程度，就像超市中的热门商品在货架上随处可见且易于购买一样。例如，现金是一种更具流动性的资产，而交易活跃的股票则是易于买卖的流动性资产，而房地产则是不太流动且难以买卖的。高频交易是一种利用复杂算法的自动化交易形式。高频交易公司利用先进技术和数据分析来识别和利用短期交易机会，以极高的速度执行大量订单。它增加了交易活动和市场效率。它在不同交易平台之间碎片化的交易可能会在市场压力加大时导致闪崩和流动性短缺。 

作为普通投资者， 我们应该关注闪崩，因为它们可能会直接和间接地影响我们的投资组合、财务状况和对金融体系的信心。了解与闪崩相关的风险，并随时关注市场动态，可以帮助我们应对波动的市场条件，并做出谨慎的投资决策。 

人物简介

何学中教授于2022年加入了西浦国际商学院（IBSS）金融系，担任教授一职。在此之前的十年里（2013-2022），他曾担任《经济动态与控制杂志》（一本ABDC A*级期刊）的联合主编。此外，他还担任多个财务和经济领域期刊的高级编辑、部门编辑、副编辑和客座编辑。何教授是资产定价、金融市场建模、市场微观结构以及金融经济学和一般经济学中的非线性动力学方面的国际公认专家。他的国际研究影响力体现在他在金融和经济学领域的发表论文、被邀请为著名的《金融市场手册》和《计算经济学手册》做的专题综述、在国际会议上发表的众多主题演讲，以及多个在澳大利亚和中国获得的有竞争力的研究资助项目。在研究影响方面，RePEc（经济学研究论文）排名将何教授列为亚洲和中国前3%的学者。他已经出版了1本书、15个书章节，以及在《金融杂志》、《管理科学》、《经济研究》、《经济动态与控制杂志》、《经济行为与组织杂志》、《宏观经济动力学》和《银行与金融杂志》等期刊上发表了60多篇论文。他的论文在Scopus中被引用超过3,600次，在Google Scholar中被引用超过6,000次。