Would Price Limits Have Made any Difference to the 'Flash Crash' on May 6, 2010
On May 6, 2010, the U.S. equity markets experienced a brief but highly unusual drop in prices across a number of stocks and indices. The Dow Jones Industrial Average (see Figure 1) fell by approximately 9% in a matter of minutes, and several stocks were traded down sharply before recovering a short time later. The authors contend that the events of May 6, 2010 exhibit patterns consistent with the type of "flash crash" observed in their earlier study (2010). This paper describes the results of nine different simulations created by using a large-scale computer model to reconstruct the critical elements of the market events of May 6, 2010. The resulting price distribution provides a reasonable resemblance to the descriptive statistics of the second-by-second prices of S&P500 E-mini futures from 2:30 to 3:00 p.m. on May 6, 2010. This type of simulation avoids "over-fitting" historical data, and can therefore provide regulators with deeper insights on the possible drivers of the "flash crash," as well as what type of policy responses may work or may not work under comparable market circumstances in the future. Our results also lead to a natural question for policy makers: If certain prescriptive measures such as position limits have a low probability of meeting their policy objectives on a day like May 6, will there be any other more effective counter measures without unintended consequences?
Multi-agent decision making, Uncertainty
Artificial Intelligence and Robotics | Finance and Financial Management | Portfolio and Security Analysis
The Review of Futures Markets
special ifm issue
LEE, Wing Bernard; CHENG, Shih-Fen; and KOH, Annie.
Would Price Limits Have Made any Difference to the 'Flash Crash' on May 6, 2010. (2011). The Review of Futures Markets. 19, (special ifm issue), 55-93. Research Collection School Of Information Systems.
Available at: http://ink.library.smu.edu.sg/sis_research/1392