How Does a Flash Crash Affect the Relationship between Volume and Spread?
During a flash crash, prices plummet rapidly, often triggered by automated selling or a sudden shock. This event is characterized by extremely high, panic-driven volume.
However, the bid-offer spread widens dramatically because market makers temporarily withdraw their bids or widen them severely due to extreme risk and uncertainty, leading to a temporary collapse of liquidity despite the high volume of transactions.
Glossar
Crash
Collapse ⎊ A precipitous and sustained decline in the valuation of a cryptocurrency, options contract, or financial derivative, often characterized by rapid liquidity evaporation and cascading margin calls.
Flash Crash
Phenomenon ⎊ A flash crash is a market phenomenon characterized by an extremely rapid, deep, and short-lived decline in the price of a cryptocurrency or derivative contract.