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Flash crash

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In modern finance, a flash crash is a very rapid, deep, and volatile fall in security prices occurring within a very short time period followed by a quick recovery.[1] Flash crashes are frequently blamed by media on trades executed by black-box trading, combined with high-frequency trading, whose speed and interconnectedness can result in the loss and recovery of billions of dollars in a matter of minutes and seconds, but in reality occur because almost all participants have pulled their liquidity and temporarily paused their trading in the face of a sudden increase in risk.[2]

Occurrences

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Examples of flash crashes that have occurred:

2010 flash crash

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Main article: 2010 flash crash

This type of event occurred on May 6, 2010 in the United States. A $4.1 billion trade on the New York Stock Exchange (NYSE) resulted in a loss to the Dow Jones Industrial Average of over 1,000 points and then a rise to approximately previous value, all over about fifteen minutes. The mechanism causing the event has been heavily researched and is in dispute. On April 21, 2015, the U.S. Department of Justice laid "22 criminal counts, including fraud and market manipulation" against Navinder Singh Sarao, a trader. Among the charges included was the use of spoofing algorithms.[10]

2017 Ethereum Flash Crash

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On June 22, 2017, the price of Ethereum, the second-largest digital cryptocurrency, dropped from more than $300 to as low as $0.10 in minutes at GDAX exchange. Suspected for market manipulation or an account takeover at first, later investigation by GDAX claimed no indication of wrongdoing. The crash was triggered by a multimillion-dollar selling order which brought the price down, from $317.81 to $224.48, and caused the following flood of 800 stop-loss and margin funding liquidation orders, crashing the market.[11]

British pound flash crash

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On October 7, 2016, there was a flash crash in the value of sterling, which dropped more than 6% in two minutes against the US dollar. It was the pound's lowest level against the dollar since May 1985. The pound recovered much of its value in the next few minutes, but ended down on the day's trading, most likely due to market concerns about the impact of a "hard Brexit"—a more complete break with the European Union following Britain's 'Leave' referendum vote in June. It was initially speculated that the flash crash may have been due to a fat-finger trader error or an algorithm reacting to negative news articles about the British Government's European policy.[12]

USDJPY and AUDUSD flash crash

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On January 2, 2019, a flash crash was seen in the value USDJPY and AUDUSD, which dropped more than 4% in a few minutes. It was the USD lowest level against the Yen and AUD against USD since March 2009. The USDJPY and AUDUSD recovered much of its value in the next few minutes. It was speculated that the flash crash may have been due to Apple reporting reduced sales forecast in China but this seems unlikely as the report came out an hour before the actual crash.[13] The lows reported on USDJPY also varied with Reuters reporting a low of 104.90 on USDJPY while FXMarketAPI reported a low of 104.45.[14]

Flash Crash of European Stock Markets on May 2, 2022

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On May 2, 2022, from 9:56 to 10:01 CET the Swedish OMXS30 index dropped 6.8%, the Norwegian OBX 4.1%,[15] the Danish OMXC25 -6.7% and the Finnish OMXH25 -7.5%.[16] Other European indices dropped too, although not as severely as the Nordic exchanges. The German DAX dropped 1.6%[17] and the European STOXX 600 2.2%.[18] At their lowest point around €300bn or $315bn had been erased from the markets.[19] The indices quickly rebounded to levels at or slightly below what it was before the crash. A spokesperson for Nasdaq said the crash was not because of internal server errors or hacker attacks. Nasdaq stated that trades done during the crash would not be cancelled on the exchanges that it operates.[20] There were rumors that Citigroup had accidentally sold a large basket of European stocks over the market.[21] Later in the afternoon Nasdaq confirmed that the flash crash was due to a very large accidental sell order by a market participant, a so-called fat-finger error. Nasdaq would not comment which market participant it was.[22] Later in the day Citigroup admitted that the crash was caused by "an error when inputting a transaction" by one of its traders at their London trading desk.[23]

Other crashes

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In October 2013, a flash crash occurred on the Singapore Exchange which wiped out $6.9 billion in capitalization and saw some stocks lose up to 87 percent of their value. The crash resulted in new regulations being announced in August 2014. Minimum trading prices of 0.20 cents per share would be introduced, short positions would be required to be reported, and a 5 percent collateral levy implemented. The exchange said the measures were to curb excessive speculation and potential share price manipulation.[24]

Two short-lived (less than a second) movements (more than 1%) in several (40 and 88) stock prices followed by recovery were reported for November 25, 2014.[25]

Significance of recovery

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Events described as flash crashes typically exhibit a rapid partial or total price rebound.[26] Conversely, rapid price falls in response to adverse news (e.g. disappointing earnings announcements) which do not rapidly revert are simply crashes or, colloquially, falling knives.[27]

See also

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References

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  1. ^ "Flash crashes explained". IG. Retrieved 2022-05-09.
  2. ^ Bozdog, Dragos (July 2011). "Rare Events Analysis of High-Frequency Equity Data". Wilmott Journal. Wilmott Journal: 74–81. SSRN 2013355.
  3. ^ "Pound's plunge joins growing list of 'flash crashes'". Financial Times. 7 October 2016. Retrieved 27 October 2017.
  4. ^ "Switzerland's central bank lost $51 billion and the franc is getting hammered". Business Insider. Retrieved 2017-10-30.
  5. ^ Davies, Rob (2016-10-07). "What caused the pound's flash crash?". The Guardian. ISSN 0261-3077. Retrieved 2017-10-30.
  6. ^ "Three things caused the flash crash in forex market". ForexLive. Retrieved 2019-01-03.
  7. ^ "Currencies flash crash recap: Where are we now?". ForexLive. Retrieved 2019-01-03.
  8. ^ "Nordic stocks hit by flash crash, broker says". Financial Post. 2 May 2022. Retrieved 2022-05-02.
  9. ^ "Brief crash hits European stocks in holiday-thinned trading". Reuters. Retrieved 2022-05-02.
  10. ^ "How a Mystery Trader With an Algorithm May Have Caused the Flash Crash". Bloomberg.com. 2015-04-22. Retrieved 2017-02-08.
  11. ^ Kharpal, Arjun (22 June 2017). "Ethereum briefly crashed from $319 to 10 cents in seconds on one exchange after 'multimillion dollar' trade". CNBC. Retrieved 24 June 2017.
  12. ^ "Pound struggles to recover after plunging 6% in 2 minutes". Financial Times. 7 October 2016.
  13. ^ "Yen flash crash: what happened and why". Financial Times. 3 January 2018.
  14. ^ "FXMarketAPI". FXMarketAPI.
  15. ^ "OBX Total Return Index (OBX.OL) Charts, Data & News - Yahoo Finance". finance.yahoo.com. Retrieved 2022-05-02.
  16. ^ "OMX Helsinki 25 (^OMXH25) Charts, Data & News - Yahoo Finance". finance.yahoo.com. Retrieved 2022-05-02.
  17. ^ "DAX PERFORMANCE-INDEX (^GDAXI) Charts, Data & News - Yahoo Finance". finance.yahoo.com. Retrieved 2022-05-02.
  18. ^ "STXE 600 PR.EUR (^STOXX) Charts, Data & News - Yahoo Finance". finance.yahoo.com. Retrieved 2022-05-02.
  19. ^ "Citi Says Trader Made Error Behind Flash Crash in Europe Stocks". Bloomberg.com. 2022-05-02. Retrieved 2022-05-03.
  20. ^ Axelsson, Martin Rex•Jonathan (2022-05-02). "Nasdaqs besked efter börskraschen: Inga avslut kommer makuleras". Dagens industri (in Swedish). Retrieved 2022-05-02.
  21. ^ Rex, Jonathan Axelsson•Martin (2022-05-02). "Extremt hack i börskurvan på Stockholmsbörsen". Dagens industri (in Swedish). Retrieved 2022-05-02.
  22. ^ Wikén, Erik; De Vivo, Lucas (2022-05-02). "Plötsligt jätteras på Stockholmsbörsen". SVT Nyheter (in Swedish). Retrieved 2022-05-02.
  23. ^ "Citi Says Trader Made Error Behind Flash Crash in Europe Stocks". Bloomberg.com. 2022-05-02. Retrieved 2022-05-03.
  24. ^ "Singapore Exchange regulators change rules following crash". Singapore News.Net. Archived from the original on 8 August 2014. Retrieved 2 August 2014.
  25. ^ "Two mini-flash crashes rock stock market Tuesday". MarketWatch. Retrieved 25 November 2014.
  26. ^ "What Is a Flash Crash?". Investopedia. Retrieved 2022-05-09.
  27. ^ "What Is a Falling Knife?". Investopedia. Retrieved 2022-05-09.
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