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 And had others followed suit in Barclays footsteps and withdrawn markets due to a stop loss triggered wipe out in the FX market, compounded by fundamental uncertainty, it is easy to see how the yen may well have surged far,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.