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Are Flash Crashes Caused by Instabilities Arising from Rapid Trading?

Recent flash crashes have posed a puzzle for finance theory. Classical finance theory would stipulate that large pools of arbitrage capital should preclude such events. The asset flow model provides an explanation based on the finiteness of capital and motivations based on price trend. In particular, we show that a stable point of equilibrium becomes unstable upon either (i) increasing the cash of the trend based investors relative to those motivated by valuation, or (ii) decreasing the time scale for the trend based traders. In particular, as trading becomes more rapid, one has more instability. Furthermore, the "excursions" from equilibrium, which we define as the maximum deviation of the price from the curve of equilibria increase as the trend based traders focus on a shorter time scale.