Lecture 2

Lecture 2

Lecture 2

Speaker: Xuezhong (Tony) He

Tony joined the IBSS Department of Finance as a Professor in Finance in 2022. He had been a Co-Editor of the Journal of Economic Dynamics and Control (an ABDC A* journal) for ten years (2013-2022). He is also a Senior Editor, Department Editor, Associate Editor, and Guest Editor for several other journals in finance and economics. Tony is an internationally recognized expert in asset pricing, financial market modeling, market microstructure, financial economics, and nonlinear dynamics in finance and economics. His international research profile is attested by his publications in finance and economics, invited contributions to the prestigious Handbook of Financial Markets and Handbook of Computational Economics, numerous keynote talks at international conferences, and many competitively Australian and Chinese research grants. Regarding research impact, the RePEc (Research Papers in Economics) Ranking puts Tony in the Top 3% in Asia and China. He has published 1 book, 15 book chapters, and more than 60 papers in journals, including The Journal of Finance, Management Science, Economic Research Journal (经济研究), Journal of Economic Dynamics and Control, Journal of Economic Behaviour and Organization, Macroeconomic Dynamics, and Journal of Banking and Finance. His publications have been cited over 3,600 times in Scopus and 6,000 times in Google Scholar.

Topic: High-Frequency Trading and Market Liquidity


On May 6, 2010, major stock indices in the US experienced unprecedented volatility and sharp declines in prices at around 2:32 p.m. The Dow Jones Industrial Average (DJIA) plummeted nearly 1,000 points, or approximately 9%, within minutes, marking one of the largest intraday point declines in its history. Similarly, other major indices, including the S&P 500 and Nasdaq Composite, also experienced significant losses. Following the initial plunge, the market swiftly rebounded, with prices recovering most of their losses within about 36 minutes. By the end of the trading day, the major indices had regained much of their lost ground, though not entirely. This is referred to as The Flash Crash of 2010.

The Flash Crash was attributed to a confluence of factors, including high-frequency trading (HFT), liquidity imbalance and dry up, fragmented trading venues and the lack of uniform circuit breakers across exchanges; and “mini-flash crashes” occurred in individual stocks and exacerbated market uncertainty. In the aftermath of the Flash Crash, regulatory authorities, including the U.S. Securities and Exchange Commission (SEC), launched investigations to determine the root causes of the event and identify potential reforms to prevent similar occurrences in the future.

This lecture will help us to understand market liquidity and how HFT affects market liquidity. Liquidity refers to how easily an asset can be bought or sold without significantly affecting its price, just like popular groceries in a supermarket are readily available on the shelves and easy to purchase. For example, cash is a more liquid, and highly traded stocks are liquid and easy to buy or sell, while real estate is illiquid and difficult to buy or sell. HFT is a form of automated trading using sophisticated algorithms. HFT firms use advanced technology and data analysis to identify and exploit short-term trading opportunities to execute large numbers of orders at extremely high speeds. It increases trading activity and market efficiency. It may fragment liquidity across different trading platforms, contributing to flash crashes and liquidity shortages during periods of market stress.

As ordinary investors, we should care about flash crashes because they can have direct and indirect consequences for our investment portfolios, financial well-being, and confidence in the financial system. Understanding the risks associated with flash crashes and staying informed about market developments can help us navigate volatile market conditions and make prudent investment decisions.

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