The Anatomy of a Crash: Liquidity Black Holes and ETF Options During the Flash Crash of 2010
Review of Futures Markets, 23(2), 49-69, 2013
30 Pages Posted: 8 Sep 2015
Date Written: December 17, 2013
Abstract
We analyze the behavior of both the bid-ask spread and the depth of ETF options during the May 6th, 2010 Flash Crash. During the Flash Crash stub quotes (maximum quote size allowed) consistently occurred for more than 90% of the ETF option series examined in this study. Correspondingly, the best bid-ask depth for these options completely disappeared for several minutes during the Flash Crash, showing that all liquidity had totally disappeared from the market. Even after the stock market recovered from the Flash Crash the option spreads were significantly larger and the depth smaller compared to before the crash. Such a sudden decline in prices, expansion of bid-ask quotes, and removal of depth with no apparent associated news event is called a “liquidity black hole” and occurs more often than publicly reported.
Keywords: Flash Crash, ETF options, bid-ask spread, depth, liquidity
JEL Classification: G1
Suggested Citation: Suggested Citation