The Flash Crash : A Cautionary Tale about Highly Fragmented Markets

A breakdown of cross-market arbitrage activity makes markets more fragile, and could result in price crashes. We provide supportive evidence for this novel channel based on a high-frequency analysis of the most salient crash in recent history: The Flash Crash. We further show that such event can be extremely costly for a large seller trading in a particular venue as he effectively relies on local liquidity supply only. These findings highlight the vulnerability of today's highly fragmented markets