Fragility of Financial Markets: The Italian Debt Not-So-Flash Crash

Market inefficiency of flash-crash type is a new form of financial fragility which plagues economically central markets. We argue that this fragility is unambiguously signaled by explosive and fast-reverting trends. Using this intuition, we introduce a novel test for flash crash detection, and we apply it to a paradigmatic case study: the collapse of Italian sovereign bonds on May 29, 2018, triggered by political turmoil. Because of the misfunctioning of the secondary market in that week, we estimate that 450 million euros were transferred from Italian taxpayers to primary dealers. (Not-so-)Flash crashes can thus be a serious threat to financial stability.