Flash crash

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A flash crash is a very rapid, deep, and volatile fall in security prices occurring within an extremely short time period. A flash crash frequently stems from 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.[1]

Description[edit]

Flash crash occurs when there is a very rapid, deep, and volatile fall in security or financial instrument prices within an extremely short time period.[2] Flash crashes frequently stem from 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.[1]

Occurrences[edit]

Four notable[according to whom?] flash crashes have occurred as of October 2016:[citation needed]

The Flash Crash[edit]

This type of event occurred on May 6, 2010. A $4.1 billion trade on the New York Stock Exchange (NYSE) resulted in a loss to the Dow Jones Industrial Average of over 1000 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.[3]

2017 Gold Flash Crash[edit]

On June 26, 2017, around 2 billion dollars worth of Gold futures were sold, which made the price suddenly plunge by $18 an ounce (1.6%) in a minute, before bouncing back to $1,236. The exact reason of the flash crash was unknown, but believed to be the result from wrong selling orders by a "Fat Finger".[4]

2017 Ethereum Flash Crash[edit]

On June 22, 2017, the price of Ethereum, the second largest digital cryptocurrency, dropped from more than $300 to as low as $0.1 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 multi-million-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.[5]

AP Tweet Flash Crash[edit]

On April 23, 2013, the AP's Twitter account was hacked to release a hoax tweet about fictional attacks in the White House that left President Obama injured.[6]

Euro vs. pound flash crash[edit]

British pound flash crash[edit]

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.[7]

Other crashes[edit]

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.[8]

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.[9]

See also[edit]

References[edit]

  1. ^ a b Bozdog, Dragos. "Rare Events Analysis of High-Frequency Equity Data". papers.ssrn.com. Wilmott Journal, pp. 74–81, 2011. SSRN 2013355Freely accessible. 
  2. ^ Aldridge, I., Krawciw, S., 2017. Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading and Flash Crashes. Hoboken: Wiley. ISBN 978-1-119-31896-5
  3. ^ "How a Mystery Trader With an Algorithm May Have Caused the Flash Crash". Bloomberg.com. 2015-04-22. Retrieved 2017-02-08. 
  4. ^ Durden, Tyler (26 June 2017). "Gold Flash Crashes As "Someone" Dumps $2 Billion, "Fat Finger" Blamed". ZeroHedge. Retrieved 26 June 2017. 
  5. ^ 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. 
  6. ^ Murphy, Samantha. "AP Twitter Hack Falsely Claims Explosions at White House". Mashable. Retrieved 2017-02-08. 
  7. ^ "Pound struggles to recover after plunging 6% in 2 minutes". Financial Times. 7 October 2016. 
  8. ^ "Singapore Exchange regulators change rules following crash". Singapore News.Net. Retrieved 2 August 2014. 
  9. ^ "Two mini-flash crashes rock stock market Tuesday". MarketWatch. Retrieved 25 November 2014. 

External links[edit]