The Flash Crash: A New Deconstruction

Abstract

The “Flash Crash” of May 6th, 2010 comprised an unprecedented, rapid decline in the Dow Jones Industrial Average that was followed by a rapid, disorderly recovery of prices. We illuminate the causes of this singular event with the first analysis of all order book activity at millisecond granularity. We document previously overlooked market data anomalies and establish that these anomalies Granger-caused liquidity withdrawal. Our results suggest that the illegal spoofing behavior of a single trader, Navinder Sarao, had little impact on market prices, but that the combined effects of large sell orders and widespread liquidity withdrawal caused prices to collapse.