ECB paper models causes of flash crashes
Informational asymmetry and thin participation can cause liquidity problems, paper argues
High-frequency trading in asset markets can cause informational asymmetries which may lead to "flash crashes", a working paper published by the European Central Bank argues.
In High frequency trading and fragility, Giovanni Cespa and Xavier Vives present a model of an asset trading market. Limited market participation and "an informational friction resulting from high-frequency trading" can lead to traders' liquidity consumption decisions showing "strategic complementarities".
This means, the
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