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Barclays Kills Yen Trading During USDJPY Flash Crash, Pulls All Liquidity To Protect Prop Positions

Tyler Durden's picture





 

In an eerie recreation of the events that transpired during last year's flash crash, among the reasons for the spectacularly wide spreads during yesterday's dramatic yen surge (which was more than just a selloff of in the USDJPY but virtually all carry pairs as we pointed out previously) is that various brokers pulled away their entire market making in the currency. While the full list is those who turned the machines off is still unknown, one company is. According to Dow Jones, "Barclays Capital pulled yen prices off its Barx dealing system for a short period Wednesday, as the Japanese currency fizzed to its strongest levels on record, a person familiar with the situation said Thursday." The reason: "to protect themselves during hectic trading conditions" - but why, remember there is no more prop trading on Wall Street (wink wink). And had others followed suit in Barclays footsteps and withdrawn markets due to a stop loss triggered wipe out in the FX market, compounded by fundamental uncertainty, it is easy to see how the yen may well have surged far, far higher. Luckily, it did not happen this time, although the USDJPY is trading at all all time lows today. On the other hand, if the market, despite trillions in capital injected by the central planners is so jittery it can take out all bids in what is supposedly to be the world's most liquid market on literally a moment's notice, we wonder just what will happen if and when Bernanke announces the end of QE3 and we have a repeat crisis...

More from Dow Jones:

In a spectacular move, the dollar collapsed against the yen at 2100 GMT Wednesday, sinking 4% to hit a record low of Y76.25.

Most big banks' systems functioned normally during that hectic period, albeit with a markedly wider spread between where the banks were prepared to buy and sell the currency--a feature that reflected extreme market stress and uncertainty. But Barx was unavailable, a Switzerland-based user said.

"All of the banks showed wide spreads--they went into panic mode," the Barx user said, speaking on condition of anonymity.

"But I use six banks, and of them, only Barx was down," he said, adding that he was unable to trade yen on the system for an hour.

A person familiar with the situation said that Barx didn't experience any technical difficulties, but the bank's traders decided to pull prices from the system to protect themselves during hectic trading conditions at what is normally a quiet time of day.

But why would Barlcays need to protect itself from a plunging market. Recall that the bank, per the Volcker rule, should not have prop positions, right? In fact, the wider the underlying bid/ask margins, the greater the profit for all those agents who trade it. After all, that is what the Dodd-Frank bill contemplated.

Are the banks telling us they, gasp, were only kidding when they said they were dismantling their non-flow operations? Surely the banks would never lie to the indentured servants, which is why we can only assume Dow Jones has misheard and the only reason BARX pulled away is not to fleece investors with gargantuan bid/ask spreads.

 


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Thu, 03/17/2011 - 14:51 | Link to Comment jus_lite_reading
jus_lite_reading's picture

Nothing like pulling the plug on liquidity to help the situation! IDIOTS!

Which has me thinking about GE's stock price which wil collapse once the nations begin to rethink their nuclear power plans! Got gold and silver suckers?

Thu, 03/17/2011 - 16:36 | Link to Comment Whizbang
Whizbang's picture

Ain't nobody pulling any plans for power plants anytime soon, this 'taking time to review safety documentation' is simply to reassure their populations that they are looking out for them. It has already been decided that Nuclear Power is the next step in global development.

Thu, 03/17/2011 - 14:51 | Link to Comment ZeroPower
ZeroPower's picture

I guess now we can finally relate this to (read: is being publicized) how trading desks can pull, at their discretion, all their MM duties with respect to equities as soon as a black swan event happens like every x years.

If not banks and IB dealers to take the other side of the trade, who the fuck else?

Thu, 03/17/2011 - 15:09 | Link to Comment taraxias
taraxias's picture

exactly ++++

Thu, 03/17/2011 - 14:53 | Link to Comment rubearish10
rubearish10's picture

Scary thought. I better spread out my accounts even further....Seriously, look at PM's. They've been pretty firm and fair relative to what's going on. No one could ever say they didn't have the opportunity to own it!

Thu, 03/17/2011 - 14:55 | Link to Comment equity_momo
equity_momo's picture

Next year im optimistic we shall read the headline :

"Taxpayer kills Barclays trading with middle finger"

 

Well one can hope.

Thu, 03/17/2011 - 14:57 | Link to Comment tmosley
tmosley's picture

Bullshit, it was Waddle and Reed and you know it.

lol

Thu, 03/17/2011 - 14:58 | Link to Comment H. Perowne
H. Perowne's picture

I blame the snow, personally.

Thu, 03/17/2011 - 14:59 | Link to Comment Josh Randall
Josh Randall's picture

Cue the Airlift of Women and Children

Thu, 03/17/2011 - 14:59 | Link to Comment Agent P
Agent P's picture

In honor of St. Patrick's Day, let's have the guys from the Guinness commercials explain...

"Volker rule says we need to stop our prop trades."

"But I don't want to do that."

"I've got it!  We'll put clients on the other side of the trade."

"Genius!  Wait, isn't that bad for our clients?"

"Fuck them!"

"Oh, right.  Brilliant!"

Thu, 03/17/2011 - 16:02 | Link to Comment Abiggs
Abiggs's picture

In honor of St. Patrick's Day, have a few more drinks then come back to this forum and see if you can add something relevant to the topic...

Thu, 03/17/2011 - 14:58 | Link to Comment oddjob
oddjob's picture

# 90 Barclays top buyer of Endeavour Silver so far today on TSX,all buys no sells.

Thu, 03/17/2011 - 15:01 | Link to Comment Buckaroo Banzai
Buckaroo Banzai's picture

A profound example why QE2 MUST lead to QE3, then QE4, etc ad nauseaum, until the system collapses.

Thu, 03/17/2011 - 15:03 | Link to Comment The Axe
The Axe's picture

second SNOW

Thu, 03/17/2011 - 15:04 | Link to Comment nobusiness
nobusiness's picture

Are we looking at a gap open in the S&P to 1300 tomorrow in order to crush anyone who dare short this market???

 

Some nice coordinated intervention should do the trick.

Thu, 03/17/2011 - 16:33 | Link to Comment InconvenientCou...
InconvenientCounterParty's picture

thinking we have something resembling a classical market is a mistake. Stop thinking it's a market and you will increase your odds of getting what you want.

Thu, 03/17/2011 - 15:05 | Link to Comment johnnyblade
johnnyblade's picture

jpm spiking

Thu, 03/17/2011 - 15:10 | Link to Comment nobusiness
nobusiness's picture

Someone just had to have 4 million shares of JPM in the last 10 minutes.  Can't be inside info, na.

Thu, 03/17/2011 - 16:45 | Link to Comment gmrpeabody
gmrpeabody's picture

A lot of buying during that last hour. All the problems must be fixed now. Or someone knows silver is set to get slaughtered soon. We can only watch.

Thu, 03/17/2011 - 15:07 | Link to Comment Ari Gold
Ari Gold's picture

They didn't even have the respect to take 3 minutes to come up with a semi-plausable lie "to protect themselves"...

Thu, 03/17/2011 - 15:10 | Link to Comment Cleanclog
Cleanclog's picture

The day of only machines is approaching.  

Just planted my spring/summer feeding garden as my reliance on machines makes me fearful.  I don't really think those machines care about me.

Thu, 03/17/2011 - 15:09 | Link to Comment Doode
Doode's picture

Anyone who knows anything about market making knows that you have to carry a relatevly substantial short term position. You never have equal bid/ask size hits all the time. This is why the market moves up and down. If they had prop trading then in fact they would not shut down their trading to make the most from the move. Only if you are a market maker you would not want to participate in this carnage - as an MM they had to buy all the way down.

 

This is a ludicrous point about Volcker rule.

Thu, 03/17/2011 - 15:11 | Link to Comment Concentrated po...
Concentrated power has always been the enemy of liberty.'s picture

Tyler you said "the end of QE3".  You must have meant the end of QE143...This only ends when we can't afford the cotton to print with.  Is that why cotton keeps spiking?!?!?

Thu, 03/17/2011 - 15:10 | Link to Comment Minyan Vince
Minyan Vince's picture

the Volcker rule under DoddFrank doesn't kick in until July 2014...

Thu, 03/17/2011 - 15:12 | Link to Comment Ben Chowd
Ben Chowd's picture

Farx

Thu, 03/17/2011 - 15:23 | Link to Comment CIABS
CIABS's picture

i thought these institutions could be relied upon always to perform their public service as liquidity providers.

Thu, 03/17/2011 - 15:25 | Link to Comment jkruffin
jkruffin's picture

Time to short the last 30 mins of this ponzi market. No way this fake rally holds.

Thu, 03/17/2011 - 15:32 | Link to Comment plocequ1
plocequ1's picture

Its your Dollar.. I meant 76.02

Thu, 03/17/2011 - 15:34 | Link to Comment nobusiness
nobusiness's picture

I'm Short, but I have had my head handed to me by Bernacke in the past on an options expirations day.  He know he can get the most bang for the buck on expiration days.  Be careful.

Thu, 03/17/2011 - 15:30 | Link to Comment FreakuentFlyer
FreakuentFlyer's picture

btw, if someone is performing a role of a market maker (aka "liquidity provider"), it means that they have limit orders sitting on both sides of the book (limit-buy & limit-sell/short).

 

when an aggressive seller sends a sell-market-order, it is crossed with that limit-buy order from the above.

then the market maker is hoping that moments later, an aggressive buyer will come long and submit a buy-market-order which will get crossed with the limt-sell/short order by the market maker. thereby completing buy-low/ sell-high round trip for the market maker.

 

but, if all you have is agressive sellers one after another, they will move the bid prices lower. eventually the market maker will be stuck with a long position whose "price" is higher than the current best offer (aka the price for their limit-sell/short side of the market making operation). which means that they lose money.

 

if they are a market maker, they should just exit the market until they see an equilibrium of aggressive sellers and buyers.

 

but, if you are a prop shop, then you can just go with the flow and start agressively shorting the ppl who have not yet gotten out of the way.

 

long story short, the fact that this bank got out when there were just aggressive sellers in the market, tells me that they were indeed just a making markets, and not the other way around. the "wide" spread is just an attempt to mitigate the recent imbalance between agressive sellers and agressive buyers, but by no means does it guarantee that agressive buyers will come to play (and help the MM close the other side of their positions, at a profit).

 

also, making markets is different than market making. one is the style of trading anyone can do (e.g. HFT), while the other is a role in the marketplace, performed under some specific obligations (e.g. NYSE MMS/SLP), incl. the "obligation" to risk losses when such one sided market situations arise. obviously, since FX does not have a cental exchange, no one entity making markets could be under contractual obligations to be performing market making functions at all times. i suspect.

Thu, 03/17/2011 - 16:23 | Link to Comment cahadjis
cahadjis's picture

Thanks.

Thu, 03/17/2011 - 15:49 | Link to Comment savagegoose
savagegoose's picture

hey if jim rogers reads this place DONT DO IT.

 

Breakout Preview: Jim Rogers May Buy U.S. Dollar As It Nears "Tipping Point"

 

you will get em much cheaper in a few years  while picking thru the rubbish dump for something to eat.

Thu, 03/17/2011 - 16:56 | Link to Comment gwar5
gwar5's picture

"Never trust a banker who wears socks." -- Groucho Marx.

Thu, 03/17/2011 - 17:12 | Link to Comment mt paul
mt paul's picture

DXY 75.96

33 bps off 

52 wk low

Thu, 03/17/2011 - 17:39 | Link to Comment FoieGras
FoieGras's picture

To anybody who traded in 1998 or 2008 these Yen spikes are nothign new. Happened before, will happen again. Nothing to see here.

 

 

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