Abstract
We investigate the causal uncertainty surrounding the flash crash in the U.S. Treasury bond market on October 15, 2014, and the unresolved concern that no clear link has been identified between the start of the flash crash at 9:33 and the opening of the U.S. equity market at 9:30. We consider the contributory effect of mini flash crashes in equity markets, and find that the number of equity mini flash crashes in the three-minute window between market open and the Treasury Flash Crash was 2.6 times larger than the number experienced in any other three-minute window in the prior ten weekdays. We argue that (a) this statistically significant finding suggests that mini flash crashes in equity markets both predicted and contributed to the October 2014 U.S. Treasury Bond Flash Crash, and (b) mini-flash crashes are important phenomena with negative externalities that deserve much greater scholarly attention.
Highlights
Between 9:33 and 9:45, on October 15, 2014, the U.S Treasury Bond market experienced a flash crash
In July 2015, researchers from the U.S Department of Treasury, Board of Governors of the Federal Reserve System, Federal Reserve Bank of New York, U.S Securities and Exchange Commission and the US Commodity Futures Trading Commission published a comprehensive report on the day’s events which “does not reveal a single cause for the volatility seen on October 15,” and raises the particular concern that “no clear link has been identified between the event window [at 9:33 ET] and the open of the U.S equity market at 9:30 ET” [1]
First we calculate the number of mini flash crashes in the three-minute window between 9:30–9:33 on the day of the October 2014 U.S Treasury Bond Flash Crash
Summary
Between 9:33 and 9:45, on October 15, 2014, the U.S Treasury Bond market experienced a flash crash. During this twelve-minute period, the yield on the 10-year U.S Treasury bond dropped and recovered an extraordinary 1.6%. We first contextualize and explain our hypothesis as to how an increase in the number of mini flash crashes in equity markets could have contributed to the October 2014 U.S Treasury Bond Flash Crash. We explain how an increase in the number of mini flash crashes in equity markets from 9:30 to 9:33 on October 15, 2014 could have contributed to the October 2014 U.S Treasury Bond Flash Crash. Asset markets outside the U.S have experienced flash crashes as well
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