Quantitative Financial Risk Management: Theory and Practice

CHAPTER 13

Parameter Analysis of the VPIN (Volume-Synchronized Probability of Informed Trading) Metric

Jung Heon SongKesheng WuHorst D. Simon

Lawrence Berkeley National Lab

INTRODUCTION

The Flash Crash of 2010

The May 6, 2010, Flash Crash saw the biggest one-day point decline of 998.5 points (roughly 9 percent) and the second largest point swing of 1,010.14 points in the Dow Jones Industrial Average. Damages were also done to futures trading, with the price of the S&P 500 decreasing by 5 percent in the span of 15 minutes, with an unusually large volume of trade conducted. All of these culminated in market value of $1 trillion disappearing, only to recover the losses within minutes—20 minutes later, the market had regained most of the 600 points drop (Lauricella 2011). Several explanations were given about the market crash. Some notable ones are:

1. Phillips (2010) listed a number of reports, which pointed out that the Flash Crash was a result of a fat-finger trade in Procter & Gamble, leading to a massive stop-loss orders (this theory, however, was quickly dismissed, as the Procter & Gamble incident came about after much damage had already been done to the E-mini S&P 500).
2. Some regulators attributed it to high-frequency traders for exacerbating pricing. Researchers at Nanex argued that quote stuffing—placing and then immediately canceling a large number of rapid-fire orders to buy or sell stocks—forced competitors to slow down their operations (Bowley 2010).
3. The Wall Street Journal ...