Tag: Flash Crash

Flash Crash

BoE Paper Cites Opposite Impacts of Human and Automated FX Traders

A new working paper from the Bank of England analyses the role of automated trading (AT) in FX markets in a period containing the 15 January 2015 announcement by the Swiss National Bank that it had removed its EUR/CHF floor and finds that while AT “generated uninformed volatility”, human traders did the opposite.
“This ‘Swiss franc event’ represents a natural experiment as one of the largest shocks to the FX market in recent years and probably the most significant ‘black swan’ event in the period in which AT has been a prominent force in FX markets,” the paper states.

Raised Eyebrows at EUR Flash Crash Report

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.

New Report Offers “Flash Crash” Definition

Pragma Securities has released a new report that analyses FX spot market data in order to provide a more accurate definition of exactly what constitutes a “flash crash”.

Arguing that previous reports on flash crashes “have tended to look at individual events in isolation” and that “discussion of the recent trend at industry events has been correspondingly anecdotal”, the paper attempts to define what a flash crash is and then systematically track the incidences of flash crashes using this definition.

Anatomy of an FX Flash Crash

A new Staff Working Paper published by the Bank of England supports the assertion made in the original investigation by the Bank for International Settlements’ (BIS) that the October 2016 sterling flash crash may have been exacerbated by the temporary suspension of trading on CME’s sterling FX futures.
The report also uses a new methodology to measure liquidity during the event and while it concludes that the market behaved as expected during the first few seconds, thereafter the speed of the move, “goes beyond that consistent with our estimates of the likely impact on prices given the quantity of orders to sell sterling”.

And Finally…

With apologies to those loyal readers who normally part with their hard-earned cash to read this column, today I am going to make it “free to air” – mainly because I feel there is a message that simply has to get out there regarding FX execution and liquidity.
If nothing else, the ongoing Mark Johnson trial in New York is highlighting how there are some seriously poor assumptions made in the wider world about how the FX market really operates.

A New Interpretation of The Sterling Flash Crash

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.

Keeping Pace With Automation

As the FX market becomes more automated and continues trading faster, the industry needs to implement better controls to prevent disruptive behaviour, says Greg Wood, SVP, global industry operations and technology at FIA.

Drawing on his experience working in both the FX and futures markets, Wood observes that both are fundamentally driven by technology now and are highly automated.

He adds that “with any type of automation you’re going to have increases in speed and your controls have to maintain pace with the other increases in technology, so as the market gets faster, you need to have appropriate controls.”

And Finally…

I am very grateful for the responses to Thursday’s column, ranging from congratulations, through jokes, to guesses as to exactly what event triggered the Cable drop I was talking of. On the latter the favourite was the infamous (and possibly apocryphal) story of the “Carrier Down” message, but I think it was later than that.
Either way, to complete my self –indulgent look at my top 10 events from my 40 years in foreign exchange, here are the top five.

FastMatch: Last Look Gone in Two Years

Although Dmitri Galinov, CEO of FastMatch, defends the controversial practice of last look in FX, he also claims that it will be eliminated within the next two years.

Explaining why last look has become such a hotly debated topic within the FX industry, Galinov explains that it is “a valuable tool” that enables liquidity providers to quote tighter prices to their customers.

The problem, as he puts it, is that “consumers want tighter prices but they don’t want last look”. For now, however, the two appear to be mutually exclusive, which is why this is a difficult issue for the industry to solve.

Flash Crashes: A Not So Modern Phenomenon

Following the sterling flash crash last year there has been much industry debate about what the increasingly regularity and severity of these events means for FX market participants and whether anything can be done to prevent or mitigate their impact in the future.

According to Neil Crammond, risk manager for FX at Avem Capital, part of the reason why these flash events are occurring is simply that markets aren’t used to the levels of volatility that used to exist prior to the financial crisis and the implementation of quantitative easing by a number of central banks.

“I think that the problem with the modern FX market is that pre-2008 if you came in every day and someone said to you that “we’re going to have a 300 tick move in the cable every day”, you’d trade according to that,” he says.