In February this year, a record intraday fall in the Dow Jones stock index prompted a flurry of questions about market volatility. In particular, what triggers flash crashes in equity prices and why does an initial spark lead to extreme price movements in the market?
To address the second question, FCA researchers analysed a large sample of mini flash crashes and rallies in the UK equity market (PDF). Drawing on data covering all orders and trades on the UK’s major trading venues. This work suggests two key themes related to the behaviour of different participant types during the disruptions.
First, in relation to trading behaviour, large investment banks appear to drive the extreme price movements - trading aggressively in the direction of the price change. Interestingly, high-frequency traders (HFTs) tend to do the opposite – at least at the start of the price move - by leaning against the wind and trading against the direction of the price movement. A finding that reflects recent analysis by the FCA of the 2016 Sterling flash crash.