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Alternative Market Briefing

Can the next flash crash be better managed with a volatility interruption algorithm?

Friday, March 01, 2013

amb
Dr. Randolf Roth
Mark Melin, Editor of Opalesque Futures Intelligence: A significant issue with High Frequency Trading (HFT) has always been defining the activity and related behavior during times of crisis. "The issue is HFT impact on market stability," noted Dr. Randolf Roth, Head of Market Structure for the Eurex Exchange.

With the May 6, 2010 Flash Crash in mind, Eurex exchange officials detailed their proprietary "Volatility Interruption" algorithm and challenges in HFT definition. The algorithm is essentially a trailing look-back trigger that provides markets a cooling off period when abnormal volatility is detected.

"This is different from a traditional exchange circuit breaker," said Vassilis Vergotis, Executive Vice President, Head of Eurex / Americas. Exchanges traditionally stop trading simply based on a given % price move in a giving market. For instance, if the price of corn were to trigger a circuit breaker in the S&P 500, for instance, trading might stop once a 20% down move in price occurred. Such "lock limit" moves are imposed on a daily basis, on an exchange by exchange basis, and did not prevent the Flash Crash due in part to the speed in which a crash can gain momentum. In an electronic trading world high latency "electronic eye" is utilized by HFT and electronic market makers to monitor and predict liquidity disparity and vola......................

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