Federal market information technology in the post flash crash era: roles for supercomputing

Authors:
E. Wes Bethel;David Leinweber;Oliver Rübel;Kesheng Wu
Affiliations:
Lawrence Berkeley National Laboratory, Berkeley, CA, USA;Lawrence Berkeley National Laboratory, Berkeley, CA, USA;Lawrence Berkeley National Laboratory, Berkeley, CA, USA;Lawrence Berkeley National Laboratory, Berkeley, CA, USA
Venue:
Proceedings of the fourth workshop on High performance computational finance
Year:
2011

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Abstract

This paper 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 HPC environment. Our work suggests that supercomputing tools and methods will be valuable to market regulators in achieving the goal of market safety, stability, and security. Currently the key mechanism for preventing catastrophic market action are "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 volume Herfindahl-Hirschman Index (HHI) for measuring market fragmentation can indeed give strong signals ahead of the Flash Crash event on May 6 2010. This is a preliminary step toward a full-fledged early-warning system for unusual market conditions.