An explanation on this year’s flash events

Twice this year (and its only February 25) the FX press shouted, “flash crash!”. Both events merit explanation as they were vastly different. We offer ours.

Yen Flash Event – Did the Tail Wag the Dog?

What caused the yen flash event? Could it really have been retail-led following a negative revenue announcement by Apple? I agree it was surprising, but the evidence that the move was retail-led is convincing.

As others have observed, the clue is in which currencies moved and which did not. Currencies that moved sharply included the Mexican peso, South African rand and Turkish lira. There was no news from those countries. These are all currencies that are especially associated with retail trading. Currencies that barely moved included the Swiss franc, a currency that usually appreciates in a stress event as institutional investors seek safe havens currencies.

Other circumstances contributing to this move included: 1) it took place during the Japanese holiday when there would have been less Japanese institutional participation, and 2) it took place during the one hour period when the CME is down each day (southeast Asian institutions that trade on CME may otherwise have provided some resistance to the move). Add the usual pre-existing exotic options and you have a flammable cocktail.

Some commentators have expressed disbelief that the move was retail-led because retail trading represents only about 4% of global FX trading. This ignores the disproportionate number of retail traders in Japan, who are leveraged at up to 25x. A November 2018 paper by Yui Mukoyama, Naoya Kikuta, and Kazuaki Washimi of The Bank of Japan reports that 70% of retail investors are trend-followers. Trend followers would therefore amplify any move. The paper goes on to say that even the contrarians are not strictly so and may become trend followers in times of volatility, which the Apple revenue announcement on January 2 certainly caused.

I agree that it is surprising that such a move could have been retail led. It is somewhat humbling for those of us who have worked in institutional foreign exchange for most of our lives. The tail really did wag the dog

Swiss Flash Event – Time for an Eye Checkup?

At 22:06 GMT on Sunday February 10, EUR/CHF moved sharply by a “big figure” (100 pips) with some outlier trades and quotes, before returning to its previous level. The exact levels depend on which trading venues you were monitoring.

This event was markedly different from the yen event but feels familiar to some of us who have worked in FX for a while. It was at the very start of the week when some trading venues were still starting up.

In the days when most dealers were trading on keyboards and screens, we used to see such events with some regularity. The issues were two-fold: 1) At the beginning of the week the big figure is uncertain, especially to machines that are not conscious of news over the weekend; and 2) Many trading screens propose the big figure so the trader can just type in the pips. Of course, the trader can change the big figure if it is wrong. However, the big figure is usually displayed on a typeface that is small, and the pips are in a large typeface. Take a look at a manual trading screen.

Traders sometimes did not notice that the big figure was not as they intended. The result was off-market quotes by a big figure and sometimes consequent mini-flash events.

Over time, the big figure algorithms improved, traders double-checked the big figure and eventually manual traders were responsible for a diminishing proportion of quotes, so the big figure was usually set correctly before most manual traders waded in.

In the case of this event, it could well be that a screen trader did not notice that the big figure was wrong. Indeed, some banks and funds buy and sell $1mm at the beginning of the week to check that their systems are working end to end (although this was likely a bigger amount).

My money is on the theory that it was a manual trader who did not notice a wrong big figure. Or did not have his glasses on. Or both.