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 Microtechnology industry is hiring – positive developments of past years continue
09.04.2018 | IVAM Fachverband für Mikrotechnik

nachricht RWI/ISL-Container Throughput Index with minor decline on a high overall level
20.03.2018 | RWI – Leibniz-Institut für Wirtschaftsforschung

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: It’s All in the Mix: Jülich Researchers are Developing Fast-Charging Solid-State Batteries

There are currently great hopes for solid-state batteries. They contain no liquid parts that could leak or catch fire. For this reason, they do not require cooling and are considered to be much safer, more reliable, and longer lasting than traditional lithium-ion batteries. Jülich scientists have now introduced a new concept that allows currents up to ten times greater during charging and discharging than previously described in the literature. The improvement was achieved by a “clever” choice of materials with a focus on consistently good compatibility. All components were made from phosphate compounds, which are well matched both chemically and mechanically.

The low current is considered one of the biggest hurdles in the development of solid-state batteries. It is the reason why the batteries take a relatively long...

Im Focus: Color effects from transparent 3D-printed nanostructures

New design tool automatically creates nanostructure 3D-print templates for user-given colors
Scientists present work at prestigious SIGGRAPH conference

Most of the objects we see are colored by pigments, but using pigments has disadvantages: such colors can fade, industrial pigments are often toxic, and...

Im Focus: Unraveling the nature of 'whistlers' from space in the lab

A new study sheds light on how ultralow frequency radio waves and plasmas interact

Scientists at the University of California, Los Angeles present new research on a curious cosmic phenomenon known as "whistlers" -- very low frequency packets...

Im Focus: New interactive machine learning tool makes car designs more aerodynamic

Scientists develop first tool to use machine learning methods to compute flow around interactively designable 3D objects. Tool will be presented at this year’s prestigious SIGGRAPH conference.

When engineers or designers want to test the aerodynamic properties of the newly designed shape of a car, airplane, or other object, they would normally model...

Im Focus: Robots as 'pump attendants': TU Graz develops robot-controlled rapid charging system for e-vehicles

Researchers from TU Graz and their industry partners have unveiled a world first: the prototype of a robot-controlled, high-speed combined charging system (CCS) for electric vehicles that enables series charging of cars in various parking positions.

Global demand for electric vehicles is forecast to rise sharply: by 2025, the number of new vehicle registrations is expected to reach 25 million per year....

All Focus news of the innovation-report >>>

Anzeige

Anzeige

VideoLinks
Industry & Economy
Event News

LaserForum 2018 deals with 3D production of components

17.08.2018 | Event News

Within reach of the Universe

08.08.2018 | Event News

A journey through the history of microscopy – new exhibition opens at the MDC

27.07.2018 | Event News

 
Latest News

Quantum bugs, meet your new swatter

20.08.2018 | Information Technology

A novel synthetic antibody enables conditional “protein knockdown” in vertebrates

20.08.2018 | Life Sciences

Metamolds: Molding a mold

20.08.2018 | Information Technology

VideoLinks
Science & Research
Overview of more VideoLinks >>>