10.07.2016
By Rob Daly

FX Market Structure Plays Role in Flash Crash

Friday morning Bloomberg reported that the GBP/USD trading had dropped a massive 6,1% for a few minutes during early Asian trading.

Market watchers attributed the momentary plunge in trading to multiple reasons including a Financial Times story in which French President François Hollande indicated the EU’s hard line stance over Brexit.

The foreign-exchange market’s fragmented nature also contributed to the situation as participant place the same liquidity among different trading venues, explained Kamal Sharma, senior G10 FX strategist at Bank of America Merrill Lynch.

“The market remains relatively fragile and this phantom liquidity is creating some kind of illusion of stability,” he told Markets Media. “We have had some occasions over the past two to three years where we’ve had significant moves in exchange rates and volatility. You can go back to a dovish Fed at the beginning of January 2015, weak multi-factor productivity, Brexit, the Fed’s rate hike at the end of last year.”

The Bank of England has confirmed in press reports that it will be investigating the pound’s rapid trading dip.

In the meantime, it would not be accurate to call the incident a ‘“flash crash,” according to a Thomson Reuters spokesperson.

“The absolute low traded, and confirmed, in GBP/USD on Thomson Reuters Matching was 1.1491,” she noted. “We also published a ‘market low’ where a good amount of GBP 5 million or more was traded in a three-minute window. This low was 1.1500 and happened around the same time as the absolute low.”

No matter what the market calls it, such an event happening to one of the most liquid currency pairs has not occurred in recent memory, said Sharma.

The closest situation in terms of magnitude that he could identify was when the Swiss Nation Bank abandoned the Swiss franc’s 1.20 peg to the euro in early January 2015.

“We had a significant sell off in EUR/CHF,” Sharma added. “That’s the closest to where we’ve seen a significant spike in volatility of the kind that we saw today.”

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