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]

Contents

Occurrences

Examples of flash crashes that have occurred:

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

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

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

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

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

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

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

Related Research Articles

<span class="mw-page-title-main">Nasdaq</span> American stock exchange

The Nasdaq Stock Market is an American stock exchange based in New York City. It is the most active stock trading venue in the U.S. by volume, and ranked second on the list of stock exchanges by market capitalization of shares traded, behind the New York Stock Exchange. The exchange platform is owned by Nasdaq, Inc., which also owns the Nasdaq Nordic stock market network and several U.S.-based stock and options exchanges. Although it trades stock of healthcare, financial, entertainment, retail, and food businesses, it focuses more on technology stocks.

<span class="mw-page-title-main">New York Stock Exchange</span> American stock exchange

The New York Stock Exchange is an American stock exchange in the Financial District of Lower Manhattan in New York City. It is the largest stock exchange in the world by market capitalization.

<span class="mw-page-title-main">Stock market</span> Place where stocks are traded

A stock market, equity market, or share market is the aggregation of buyers and sellers of stocks, which represent ownership claims on businesses; these may include securities listed on a public stock exchange as well as stock that is only traded privately, such as shares of private companies that are sold to investors through equity crowdfunding platforms. Investments are usually made with an investment strategy in mind.

<span class="mw-page-title-main">Stock market crash</span> Sudden widespread decline of stock prices

A stock market crash is a sudden dramatic decline of stock prices across a major cross-section of a stock market, resulting in a significant loss of paper wealth. Crashes are driven by panic selling and underlying economic factors. They often follow speculation and economic bubbles.

In 2001, stock prices took a sharp downturn in stock markets across the United States, Canada, Asia, and Europe. After recovering from lows reached following the September 11 attacks, indices slid steadily starting in March 2002, with dramatic declines in July and September leading to lows last reached in 1997 and 1998. The U.S. dollar increased in value relative to the euro, reaching a 1-to-1 valuation not seen since the euro's introduction.

<span class="mw-page-title-main">Day trading</span> Buying and selling financial instruments within the same trading day

Day trading is a form of speculation in securities in which a trader buys and sells a financial instrument within the same trading day, so that all positions are closed before the market closes for the trading day to avoid unmanageable risks and negative price gaps between one day's close and the next day's price at the open. Traders who trade in this capacity are generally classified as speculators. Day trading contrasts with the long-term trades underlying buy-and-hold and value investing strategies. Day trading may require fast trade execution, sometimes as fast as milli-seconds in scalping, therefore direct-access day trading software is often needed.

E-mini S&P, often abbreviated to "E-mini" and designated by the commodity ticker symbol ES, is a stock market index futures contract traded on the Chicago Mercantile Exchange. The notional value of one contract is 50 times the value of the S&P 500 stock index; thus, for example, on June 20, 2018, the S&P 500 cash index closed at 2,767.32, making each E-mini contract a $138,366 bet.

Algorithmic trading is a method of executing orders using automated pre-programmed trading instructions accounting for variables such as time, price, and volume. This type of trading attempts to leverage the speed and computational resources of computers relative to human traders. In the twenty-first century, algorithmic trading has been gaining traction with both retail and institutional traders. A study in 2019 showed that around 92% of trading in the Forex market was performed by trading algorithms rather than humans.

The Nasdaq Composite is a stock market index that includes almost all stocks listed on the Nasdaq stock exchange. Along with the Dow Jones Industrial Average and S&P 500, it is one of the three most-followed stock market indices in the United States. The composition of the NASDAQ Composite is heavily weighted towards companies in the information technology sector. The Nasdaq-100, which includes 100 of the largest non-financial companies in the Nasdaq Composite, accounts for over 90% of the movement of the Nasdaq Composite.

An exchange, bourse, trading exchange or trading venue is an organized market where (especially) tradable securities, commodities, foreign exchange, futures, and options contracts are bought and sold.

Retail foreign exchange trading is a small segment of the larger foreign exchange market where individuals speculate on the exchange rate between different currencies. This segment has developed with the advent of dedicated electronic trading platforms and the internet, which allows individuals to access the global currency markets. As of 2016, it was reported that retail foreign exchange trading represented 5.5% of the whole foreign exchange market.

High-frequency trading (HFT) is a type of algorithmic trading in finance characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverages high-frequency financial data and electronic trading tools. While there is no single definition of HFT, among its key attributes are highly sophisticated algorithms, co-location, and very short-term investment horizons in trading securities. HFT uses proprietary trading strategies carried out by computers to move in and out of positions in seconds or fractions of a second.

<span class="mw-page-title-main">2010 flash crash</span> U.S. stock market crash lasting 36 minutes in May 6, 2010

The May 6, 2010, flash crash, also known as the crash of 2:45 or simply the flash crash, was a United States trillion-dollar flash crash which started at 2:32 p.m. EDT and lasted for approximately 36 minutes.

The Dow Jones FXCM Dollar Index (USDOLLAR) is an index of the value of the United States dollar relative to a basket of four currencies: the Euro, the British Pound, the Japanese Yen, and the Australian Dollar.

A fat-finger error is a keyboard input error or mouse misclick that occurs from a simple input mistake, causing unwanted secondary behavior. In common parlance, it simply refers to a common typographical error made on a touchscreen or physical keyboard that occurs when the wrong selection is made, or multiple selections are made due to options or keyboard keys being too close together.

<span class="mw-page-title-main">Interactive Brokers</span> American financial services firm

Interactive Brokers, Inc. (IB), headquartered in Greenwich, Connecticut, is an American multinational brokerage firm. It operates the largest electronic trading platform in the United States by number of daily average revenue trades - in 2023, it processed an average of 3 million trades per trading day. The company brokers stocks, options, futures contracts, EFPs, futures options, forex, bonds, mutual funds, and cryptocurrency. It offers omnibus and non-disclosed broker accounts and provides clearing services to 200 introducing brokers worldwide. It has operations in 34 countries and 27 currencies and has 2.6 million institutional and individual brokerage customers, with total customer equity of $426 billion as of December 31, 2023.

Spoofing is a disruptive algorithmic trading activity employed by traders to outpace other market participants and to manipulate markets. Spoofers feign interest in trading futures, stocks, and other products in financial markets creating an illusion of the demand and supply of the traded asset. In an order driven market, spoofers post a relatively large number of limit orders on one side of the limit order book to make other market participants believe that there is pressure to sell or to buy the asset.

For three hours on August 22, 2013, trading was halted on the Nasdaq Stock Market. Trading on the exchange stopped at 12:14 pm and resumed at 3:25 pm, with 35 minutes left of trading for the day. One week after the trading halt NASDAQ OMX credited the freeze to an overloading of the Securities Information Processor (SIP) caused by reconnection issues with the New York Stock Exchange Arca. The freeze received substantial media coverage and generated discussions on the security of increasingly technologically advanced stock exchanges. The event coined the term "flash freeze" following the earlier "flash crash" on May 6, 2010.

<span class="mw-page-title-main">2020 stock market crash</span> Financial market reaction to the COVID-19 pandemic

On 20 February 2020, stock markets across the world suddenly crashed after growing instability due to the COVID-19 pandemic. It ended on 7 April 2020.

References

  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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