Contagion, Correlation, Fragility, Feedback Loops, Liquidity Crashes…

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June, 2012

Contagion, correlation, fragility, feedback loop, liquidity crashes, pricewatchers, cross market arbitrageur.  These are the terms that a new paper titled “Illiquidity Contagion and Liquidity Crashes” written by Cespa and Foucault use to describe what happened during the Flash Crash and how it could happen again.  The authors believe that the evaporation of liquidity was the cause of the Flash Crash and not the large e-mini S&P futures seller that many have blamed.  The authors propose that:

“Markets for different assets have become more interconnected as market makers in one asset

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