Federal Market Information Technology in the Post–FlashCrash Era: Roles for Supercomputing

Abstract

This article describes collaborative work between active traders, regulators, economists, and supercomputing researchers to replicate and extend investigations of the Flash Crash and other market anomalies in a National Laboratory high-performance computing (HPC) environment. Our work suggests that supercomputing tools and methods will be valuable to market regulators in achieving the goals of market safety, stability, and security. Research results using high-frequency data and analytics are described, and directions for future development are discussed. Currently, the key mechanism for preventing catastrophic market action is “circuit breakers.” We believe a more graduated approach, similar to the “yellow light” approach in motorsports to slow down traffic, might be a better way to achieve the same goal. To enable this objective, we study a number of indicators that could foresee hazards in market conditions and explore options to confirm such predictions. Our tests confirm that volume-synchronized probability of informed trading (VPIN) and a version of the volume Herfindahl–Hirschman index (HHI) for measuring market fragmentation could have indeed given strong signals ahead of the Flash Crash event on May 6, 2010. This is a preliminary step toward a full-fledged earlywarning system for unusual market conditions. TOPICS:Financial crises and financial market history, statistical methods, exchanges/markets/clearinghouses

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