Forum for Science, Industry and Business

Sponsored by:     3M 
Search our Site:

 

Stock Market ‘Flash’ Crashes Now Can be Predicted, Thanks to Cornell Metric

02.12.2010
The kind of stock market “flash crash” that happened on May 26, 2010 is now predictable – and possibly preventable – thanks to a new formula developed by two Cornell professors and an investment expert.

The new “Volume-synchronized Probability of INformed trading” – or VPIN – metric looks at the imbalance of trade relative to the total volume of the market.

The developers: David Easley, Cornell professor of social sciences and chair of the Department of Economics, and Maureen O’Hara, professor of finance at Cornell’s Johnson Graduate School of Management, in collaboration with Marcos Lopes de Prado of Tudor Investments.

The metric identifies flow toxicity, which Easley and O’Hara have been researching for about 20 years.

“Flow toxicity refers to the risk that liquidity providers face when trading with traders who have better information than they do,” says Easley. The flow of orders “is considered toxic when traders are selling when they’d rather be buying, and buying when they’d rather be selling.”

Flash events occur when market makers suddenly stop trading in response to a high level of flow toxicity, resulting in a sudden drop of prices.

“All morning long on May 6 order flows were becoming increasingly unbalanced, and volumes were huge,” says O’Hara. “An hour or more before the flash crash our measure hit historic levels.”

The VPIN could prevent future flash crashes by giving market regulators warning of flow toxicity early enough that they could slowly adjust the market, says Easley. The metric could also give traders a way to hedge the risk of flash crashes, so traders don’t have to be as concerned with the value of their inventory plummeting.

O’Hara serves on the Joint Commodity Futures Trading Commission-Securities and Exchange Commission (CFTC-SEC) Advisory Committee on Emerging Regulatory Issues established after May 6.

“One of the problems that regulators face now is that markets are so fast, that regulating after the fact is really too late,” she says.

Both the CFTC and the Financial Industry Regulatory Authority economic advising board have expressed interest in the VPIN. Private firms, such as Tudor Investments, have also used O’Hara and Easley’s research to develop trading algorithms for high-frequency markets.

Easley, who is also a member of the Department of Information Science, recently co-authored “Networks, Crowds and Markets: Reasoning About a Highly Connected World” with Jon Kleinberg, Cornell professor of computer science.

“Measuring Flow Toxicity In A High Frequency World” appears online in the Social Science Research Network. (Originally published Oct. 21, 2010.) The complete paper can be found at: http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1695596

Blaine Friedlander | Newswise Science News
Further information:
http://www.cornell.edu

More articles from Business and Finance:

nachricht Europe's microtechnology industry is attuned to growth
10.03.2017 | IVAM Fachverband für Mikrotechnik

nachricht Preferential trade agreements enhance global trade at the expense of its resilience
17.02.2017 | International Institute for Applied Systems Analysis (IIASA)

All articles from Business and Finance >>>

The most recent press releases about innovation >>>

Die letzten 5 Focus-News des innovations-reports im Überblick:

Im Focus: Giant Magnetic Fields in the Universe

Astronomers from Bonn and Tautenburg in Thuringia (Germany) used the 100-m radio telescope at Effelsberg to observe several galaxy clusters. At the edges of these large accumulations of dark matter, stellar systems (galaxies), hot gas, and charged particles, they found magnetic fields that are exceptionally ordered over distances of many million light years. This makes them the most extended magnetic fields in the universe known so far.

The results will be published on March 22 in the journal „Astronomy & Astrophysics“.

Galaxy clusters are the largest gravitationally bound structures in the universe. With a typical extent of about 10 million light years, i.e. 100 times the...

Im Focus: Tracing down linear ubiquitination

Researchers at the Goethe University Frankfurt, together with partners from the University of Tübingen in Germany and Queen Mary University as well as Francis Crick Institute from London (UK) have developed a novel technology to decipher the secret ubiquitin code.

Ubiquitin is a small protein that can be linked to other cellular proteins, thereby controlling and modulating their functions. The attachment occurs in many...

Im Focus: Perovskite edges can be tuned for optoelectronic performance

Layered 2D material improves efficiency for solar cells and LEDs

In the eternal search for next generation high-efficiency solar cells and LEDs, scientists at Los Alamos National Laboratory and their partners are creating...

Im Focus: Polymer-coated silicon nanosheets as alternative to graphene: A perfect team for nanoelectronics

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are less stable. Now researchers at the Technical University of Munich (TUM) have, for the first time ever, produced a composite material combining silicon nanosheets and a polymer that is both UV-resistant and easy to process. This brings the scientists a significant step closer to industrial applications like flexible displays and photosensors.

Silicon nanosheets are thin, two-dimensional layers with exceptional optoelectronic properties very similar to those of graphene. Albeit, the nanosheets are...

Im Focus: Researchers Imitate Molecular Crowding in Cells

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to simulate these confined natural conditions in artificial vesicles for the first time. As reported in the academic journal Small, the results are offering better insight into the development of nanoreactors and artificial organelles.

Enzymes behave differently in a test tube compared with the molecular scrum of a living cell. Chemists from the University of Basel have now been able to...

All Focus news of the innovation-report >>>

Anzeige

Anzeige

Event News

International Land Use Symposium ILUS 2017: Call for Abstracts and Registration open

20.03.2017 | Event News

CONNECT 2017: International congress on connective tissue

14.03.2017 | Event News

ICTM Conference: Turbine Construction between Big Data and Additive Manufacturing

07.03.2017 | Event News

 
Latest News

Northern oceans pumped CO2 into the atmosphere

27.03.2017 | Earth Sciences

Fingerprint' technique spots frog populations at risk from pollution

27.03.2017 | Life Sciences

Big data approach to predict protein structure

27.03.2017 | Life Sciences

VideoLinks
B2B-VideoLinks
More VideoLinks >>>