Algos, Barriers, Rumors: Some Theories On What Caused The Pound Flash Crash - page 2

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The Phantom Liquidity Behind the GBP Flash-Crash


Gaps in liquidity are likely to expose foreign exchange markets to more flash crashes similar to that experienced by Sterling in October argue Bank of America.

October 7th 2016 saw the Pound fall to extreme lows, with some platforms registering declines commensurable with the referendum sell-off.

The GBP/USD pair fell to lows of anything between 1.1830 and 1.1340 depending on the platform you were looking at.

A fall to 1.1340 from the previous day’s 1.2600 close is equal to a 10% drop in percentage terms and is the same as the fall registered after the referendum.

The UK government’s tough stance on Brexit provided the fundamental context for the falls, but only some kind of market failure would explain the shear depth of the fall.

We have already heard from those who say the market's move from inter-personal dealings to algorithmic dealing was the prime reason for the failure.

An algorithmic panic-attack is certainly the consensus explanation that has energed.

But the truth is a combination of issues are most likely behind the decline.

Bank of America Merril Lynch and Abn Amro are two banks suggesting the problem may have had more to do with the ‘illiquidity’ of sterling at the time the currency began falling.

The volumes of Pounds traded during the Asian session overnight are notoriously low, and it was in these illiquid market conditions that the pound began to make step declines lower.

The simple fact is that there were not enough buy orders near to the exchange rate to conclude a deal and so this led to prices probing ever lower to find another side to transact with.

In normal liquid market conditions there is always someone -  a buyer or a seller – willing to take the other side of the deal at a price close to market, however, because the Asian session is so quiet this was not the case during the flash crash.

“Last week, Sterling experienced the second-largest daily decline ever, over the course of only a few minutes. While growing worry about a hard Brexit was the fundamental catalyst for the move, the speed and magnitude of the decline emphasizes the more furtive dangers of worsening liquidity,” say Bank of America.

Bank of America suggest the lack of liquidity is a definite risk to the stability of the FX market, and highlights complete gaps in the market where there were no orders whatsoever.

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The third lesson of the flash crash is that markets are not as liquid as they used to be. This seems to be a consequence of tighter banking regulations after the 2007 crisis: banks are less willing to commit capital to trading.

That is probably a net gain for financial stability. Banks have lots of leverage and big losses create a systemic risk; long-term institutional investors such as pension funds and insurance companies can absorb the pain of short-term asset-price moves. But it means that market-watching will increasingly resemble the life of a soldier: long periods of calm interspersed with moments of blind panic.

 
theNews:

As reported moments ago, just around 7:07pm ET, cable snapped and plunged by what some say may have been as much as 1200 pips, dropping from 1.26 to as low as 1.14 according to some brokers, before snapping back up.

 

What caused the move? While nobody knows the catalyst behind the flash crash  yet, Bloomberg has compiled several potential explanations.

  • "The GBP/USD slide could be due to erroneous order and/or flows related to stop-loss orders or options given USD/JPY or EUR/USD aren’t moving much", says Toshihiko Sakai, Tokyo-based chief manager of FX and financial products trading at Mitsubishi UFJ Trust & Banking.
  • "Looks like there was a large GBP sell order amid thin liquidity", says Kyosuke Suzuki, head of FX and money-market sales at Societe Generale.
  • Others believe that the massive move has been partly attributed to algos failing after traders targeted downside option barriers, say three Asia-based FX dealers. Traders typically place their nearest orders within 100 ticks of spot, which was at roughly 1.26 before today’s plunge.
  • The drop accelerated as liquidity disappeared, and dealers failed to load bids into their trading platforms, say traders. In other words, your plain, garden variety algo-facilitated flash crash, where the bid side suddenly disappears as one or more "liquidity providers" turn themselves off.
  • One trader told Bloomberg that his FX pricing aggregator of eight contributors blacked out for 30 seconds amid an absence of bids.
  • Furthermore, multiple large option barriers in the over-the-counter market were triggered, including 1.25 and 1.20, say traders.  Traders say they missed buy orders much lower down and had to scramble to cover inherited short positions, thus contributing to the roughly 500-point rally.

Hopefully we will have a clear, official, and accurate answer from regulators for the crash soon: investors faith in broken markets is already non-existent as it is. However, if the May 2010 flash crash is any indication, the reason behind the collapse may not be forthcoming until 2021, and even then it will be blamed on some spoofer, living in his parents' basement.

Another question: whether any FX brokerages will need a bailout a la the infamous FXCM, in the aftermath of the Swiss National Bank revaluation of January 2015, as clients find themselves margined out and underwater even as cable is steadily recovering most, if not all losses.

source

theNews:

As reported moments ago, just around 7:07pm ET, cable snapped and plunged by what some say may have been as much as 1200 pips, dropping from 1.26 to as low as 1.14 according to some brokers, before snapping back up.

 

What caused the move? While nobody knows the catalyst behind the flash crash  yet, Bloomberg has compiled several potential explanations.

  • "The GBP/USD slide could be due to erroneous order and/or flows related to stop-loss orders or options given USD/JPY or EUR/USD aren’t moving much", says Toshihiko Sakai, Tokyo-based chief manager of FX and financial products trading at Mitsubishi UFJ Trust & Banking.
  • "Looks like there was a large GBP sell order amid thin liquidity", says Kyosuke Suzuki, head of FX and money-market sales at Societe Generale.
  • Others believe that the massive move has been partly attributed to algos failing after traders targeted downside option barriers, say three Asia-based FX dealers. Traders typically place their nearest orders within 100 ticks of spot, which was at roughly 1.26 before today’s plunge.
  • The drop accelerated as liquidity disappeared, and dealers failed to load bids into their trading platforms, say traders. In other words, your plain, garden variety algo-facilitated flash crash, where the bid side suddenly disappears as one or more "liquidity providers" turn themselves off.
  • One trader told Bloomberg that his FX pricing aggregator of eight contributors blacked out for 30 seconds amid an absence of bids.
  • Furthermore, multiple large option barriers in the over-the-counter market were triggered, including 1.25 and 1.20, say traders.  Traders say they missed buy orders much lower down and had to scramble to cover inherited short positions, thus contributing to the roughly 500-point rally.

Hopefully we will have a clear, official, and accurate answer from regulators for the crash soon: investors faith in broken markets is already non-existent as it is. However, if the May 2010 flash crash is any indication, the reason behind the collapse may not be forthcoming until 2021, and even then it will be blamed on some spoofer, living in his parents' basement.

Another question: whether any FX brokerages will need a bailout a la the infamous FXCM, in the aftermath of the Swiss National Bank revaluation of January 2015, as clients find themselves margined out and underwater even as cable is steadily recovering most, if not all losses.

source

    I think from all perspective that it was not cause by algo trading alone. British PM's negative talk was part of it . Tho Algo also played a part,But its normal after brixit for GBP to double it average daily range. GBP is not like USD that have numerous ways making the USD retrace, so GBP will keep sliding down till there is market confidence of the GBP. But from all indication all the news from GBP from now on will always be negative till finish the paper work BREXIT. And still dont forge that once the paper work, it announcement will still send the GBP crashing again,

 

You are right " it will be blamed on some spoofer, living in his parents' basement.", Hahahahahaha and that s the honest truth LMAO

 

GBP flash crash & Brexit - 'The Economist' weighs in with 3 lessons


The Economist magazine on the plunge in GBP that took place Friday October 7


The most famous "flash crash" occurred on Wall Street in May 2010, when the Dow Jones Industrial Average fell by almost 1,000 points in the middle of a trading day. On that occasion, the market righted itself before drifting lower in subsequent weeks. This time, even an initial rebound in the pound still left the currency significantly weaker on the day and it dropped below $1.21 on October 11th. In trade-weighted terms, it is close to a record low.

The magazine's 3 conclusions:
1. There was more at work than algorithms
  • The pound's fall followed a series of speeches at the annual conference of the ruling Conservative Party, which were widely perceived as anti-business and anti-immigrant.
2. Volatility will emerge where it can
  • Europe had tried to reduce foreign-exchange risk by creating a single currency. So the bond market took the strain
  • Now that several central banks are pursuing QE policies, the bond-market vigilantes, who so terrorised governments in the 1980s and early 1990s, have been neutered.
  • Since it is not showing up in the bond markets ... the currency takes the heat. (ps. The Economist then jumps the shark :-D  ... Unless a currency is overvalued (as the pound was in 1992), voters should not generally cheer rapid depreciations. Repeated devaluations have not made Venezuelans or Zimbabweans rich.
3. The third lesson ... is that markets are not as liquid as they used to be
  • This seems to be a consequence of tighter banking regulations after the 2007 crisis: banks are less willing to commit capital to trading

Check out the article in full for more
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