James Trescothick

With more than 20 years of experience in financial service industry, James is our Senior Global Strategist and the co-producer and presenter of easyMarkets educational videos. When he is not working on educational programs or preparing webinars, you can find him with the easyMarkets team giving seminars around the world.

On the 7th of October 2016, there was a flash crash in the value of the Great Britain pound, where it dropped by 6% against the USD within two minutes. It was the GBP lowest level against the greenback since May 1985. Though the pound managed to recover in the next few minutes it still ended down on day’s trading session. This event was of course caused by concerns of a “hard Brexit”.

As like many traders, I have been following the GBP’s decline closely; for trading opportunities but also because I am British and I am sad to see that my once beloved currency is collapsing. However, this event on the 7th of October, got me wondering about what is a flash crash and other flash crashes which has occurred in the past.

 What is a flash crash and what is a fat finger?

Now a flash crash is a rapid, deep and volatile fall in value of an asset within an extremely short period of time.  A flash crash frequently stems from trades executed by a black box trading applications, combined with high frequency trading whose speed and interconnects can result in the loss of billions of dollars in a matter of minutes and even seconds.

A fat finger, is a human error, where by a trader accidently presses the wrong key or inputs the wrong data in trading arena resulting in a quick drop in an assets value. Though these events are generally less harmful then a flash crash there are occasions where it can also cost billions of dollars in losses. One notable event was in May 6th 2010, when a trader by accident inputted a trading order for billions instead of millions which cause a drop in the DOW JONES.

Famous Flash crashes.

April 23rd 2010

The AP’S twitter account was hacked to release a hoax tweet about fictional attacks in the White House which has injured President Obama. This fake tweet, resulted in a quick collapse of 130 points from the DOW Jones and the loss of $136 billion in the S&P 500.

 October 2013

A flash crash occurred on the Singapore exchange wiping out $6.9 billion in capitalization and saw some stocks lose up to 87% of their value.  As a result of this new stricter regulations were introduced which included minimum trading prices and reports on short positions.

 January 15th 2015

Now this one, I remember well as I was a dealer at the time and it was a very fun day.  The Swiss National Bank without any warning abandoned its cap on the CHF vs the EURO which resulted in total chaos to the FX market in a matter of minutes.  This unexpected flash crash caused the EUR/CHF to drop 40% in seconds. This caused a good number of client accounts go into a negative balance which cost many FX brokers millions of dollar and actually resulted in Alpari UK to close down. Of course my broker has negative balance protection and guaranteed stop loss so neither we or our clients were affected by this huge event.

On final note, as least with these flash crashes you can never describe the market as boring

 

 

http://www.singaporenews.net/news/224382417/singapore-exchange-regulators-change-rules-following-crash

https://www.bloomberg.com/news/articles/2015-04-22/mystery-trader-armed-with-algorithms-rewrites-flash-crash-story

http://mashable.com/2013/04/23/ap-hacked-white-house/#usR8bfOwVEqE

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