Closer scrutiny of the data associated with the sterling flash crash reveals some surprising results, argues Paul Aston, CEO of Tixall Global Advisors.
Speaking after delivering a presentation at Profit & Loss’ Forex Network New York conference, Aston explains that his firm replicated the environment of the FX market during the sterling flash crash on a simulator.
“In the course of doing that you have to get very close to the data, analyse every tick, and what we discovered was it really wasn’t the headline grabbing price movement that we saw in the flash crash, where you’re printing all the way down to 1.13 handles, it was right before that which was the most surprising bit of data,” he says.
Aston continues: “Basically the market moved very smoothly over twelve seconds, two big figures, no volatility, bid-offer spreads one to two pips wide. Which is very unusual and cannot really happen randomly when you consider all the micro structure aspects that have to go into that on a order book.”
He explains that when analysing liquidity, the focus tends to be on flows, prices and depth of book, but that there are often “hidden factors” that need to be considered. In the case of the sterling flash crash, Aston says that the factor that has been overlooked in the examinations of the event so far is the configuration of the order book.
Thomson Reuters’ platform has the most sterling activity, and Aston claims that – given the way that the Reuters order book functions – it would have been impossible to get a smooth move between 1.24 and 1.26 unless there were standing orders sitting one pip apart right next to each other for that 200 pip range.
What does he conclude from this?
Either that the flash crash was “such a twelve sigma outlier that every algo and every trader just happened to do everything right”, or, more likely, that there was one market maker or a very coordinated set of market makers that were essentially “marching the market” downwards.