Economics
‘Toxic’ Orders Predict Odds of Stock Market Crashes, Study Says
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A formula for measuring how fast the best-informed traders increase their share of market volume may help regulators prevent crashes such as the May 6 plunge, according to a study from researchers at hedge fund Tudor Investment Corp. and Cornell University.
The team developed a gauge that identifies the likelihood of market makers curtailing their activity, which can cause a rapid drop in prices. Marcos Lopez de Prado of Tudor and Cornell’s David Easley and Maureen O’Hara say the metric, similar to risk-management techniques used at some trading firms, may help regulators monitor for potential catastrophic shifts in liquidity.