It has been about about seven years since we first encountered the term ‘flash crash’. In an event allegedly triggered by S&P 500 futures trader Navinder Sarao, the Dow Jones industrial average collapsed by 1000 points, only to fully recover shortly after. The event wrecked havoc across multiple asset classes and was to date the biggest flash crash we have ever seen.
In a market which is dominated by algorithmic trading, the outsized risks associated with such events can cause traders to lose substantial resources while chasing limited gains. Brexit appears to have triggered a sudden inflow of high-frequency traders into GBP pairs. Following yesterday’s event at 17:34, the British pound has now had three flash crashes since October 2017.
All gaps formed in seconds have been quickly filled by the market and yesterday’s event was no exception. The market already recovered the losses, leaving traders scratching their heads and exposing the challenges associated with modern financial markets dominated by trading algorithms.
Trading Volumes Soar
On the bright side, just like on other occasions associated with flash crash events, trading volumes have spiked higher. Yesterday was the best day of the year for a number of retail and institutional brokers and trading venues.
Public daily volumes data from Fastmatch and Hotspot shows that both electronic communications networks posted a record day yesterday. The Average Daily Volume (ADV) metric of Hotspot, the CBOE subsidiary focused on foreign exchange, hit $44 billion, while Fastmatch marked $36 billion, which is double the typical trading day of 2017.
On the grand scale, yesterday’s British pound flash crash is a minor one. At 17:34 GMT the GBP/USD dropped from 1.2891 to about 1.2891 depending on the trading venue and the brokerage used. Within a minute or two the pair pared over half of those losses and was trading around 1.2953 at 17:36 GMT.
Cable pound Flash Crash GBP USD FX
1 minute chart !! WTF !! pic.twitter.com/5LCt14NLW8
— Trader DSS (@dssfx75) May 18, 2017
Compared to other flash events, yesterday’s episode was a blip. Yet a blip big enough to exacerbate the rise in trading volumes we have seen since the start of this week.
Curious readers can watch the full documentary called “The Wall Street Code”, which exposes some daring truths about high-frequency trading and algorithmic traders. The main character is none other but Haim Bodek, also known as “The Algo Arms Dealer”, linked to below.