A story by Bloomberg News has prompted some head-scratching amongst FX dealers after the service reported a flash crash in EUR/USD on Christmas Day, December 25.
The report says that at around 7.30am New York time on the 25th, EUR/USD plunged from 1.1860 to 1.1550 before rebounding to 1.1650 and then recovering all the way back to 1.1850 just a couple of hours later.
The Bloomberg report states, “The sudden plunge could’ve been sparked by computer-driven trading,” however dealers spoken to by Profit & Loss say their records and systems are showing nothing. One dealer says questions have been asked by “one or two customers” over a “rogue trade” and another industry source also reports “a few queries” on the euro low.
A source at a major FX bank says that no resting orders were executed on Christmas Day, observing, “We were only operating during Tokyo hours and in that window there was a tight range with very few trades.”
Although no orders appear to have been triggered, there is the possibility that some may have been, even though there are questions as to whether the FX market was officially open.
The reported trades and “flash crash” apparently occurred at 9.30pm Tokyo time on December 25 – a time when to all intents and purposes, the market was officially closed because no major FX centre was operating. Traders spoken to tell Profit & Loss that they informed their customers and counterparties that markets were “closed” from 5pm New York until 7am Tokyo on December 25 and then closed again at 5pm Tokyo on that day. “After that we weren’t officially operating until 3am Tokyo on December 26 when New Zealand and Sydney opened,” a trader in Australia says.
Depending upon whether or not orders were triggered and complaints received, the issue of opening hours could be something for the Global Foreign Exchange Committee to examine as it further evolves the FX Global Code. With several platforms open for trading on a 24/7 basis, there may be calls for better guidance on when an order, or option barrier, can be triggered in temporal terms.
Aside from a day like December 25, if FX markets are allowed to trade on a 24/7 basis the risk of a trigger event in options during the very thin weekend hours may also increase. If that is the case, market participants may seek to strengthen existing agreements around order and option barrier management.
As far as the events on December 25 are concerned, however, it does not appear to be a big issue. As the trader at the major FX trading bank says, “Even if the 1.1550 did trade, it probably wasn’t in enough to establish an official high/low for the market. There was no price action on the crosses – they all stayed where they were – which tells me this is someone playing games or an algo gone wrong.”