When The World's Reserve Currency Flash Crashed: "I Haven’t Seen Anything Like It Since The Financial Crisis’

Tyler Durden's picture

On Wednesday afternoon, just after the close of the market, the US Dollar, the world's reserve currency flash crashed. This is how the WSJ described the move:

In the latest episode Wednesday, a message from the U.S. Federal Reserve that it is in no hurry to raise interest rates caused a big slump in the dollar, which has run up a huge rally so far this year. The euro surged more than 4% against the buck, its biggest jump in a single day in 15 years, according to Deutsche Bank. Early on Thursday, the European currency resumed its slide.

 

The sheer speed of the round trip in the euro-dollar exchange rate—the world’s most heavily traded currency pair—left traders and investors reeling.

We profiled the staggering move in real-time as it was happening:

 

 

Again, this is the world's reserve currency, not some two-bit backwater currency pair. It was, also, a stunning, unheard of event.

This is how the rest of America's traders saw it, from the WSJ:

“I haven’t seen anything like it since the financial crisis,” said Paul Lambert, head of currency at Insight Investment, which manages $480 billion of assets.

 

Traders said Wednesday’s move brought back memories of January’s surge in the Swiss franc, when the currency climbed more than 40% after the Swiss central bank abandoned its policy of capping the franc’s strength against the euro. For a few minutes on Wednesday, the lack of dollar buyers caused a short-term freeze in electronic trading platforms, according to a New York-based trader at a major currency-dealing bank. “There was a lot of shouting on the desk, a lot of nervousness,” the trader said.

 

“The dollar has been experiencing fastest pace of ascent in 40 years. Our long-term outlook for the euro is still lower, but risk here is for a decent pullback,” said Matthew Cobon, head of interest rates and currencies at Threadneedle Investments in London, which has a total $54.3 billion of assets. Mr. Cobon had bet on a bounce back for the euro ahead of Wednesday’s Fed meeting.

None of this was unexpected, if only to our readers: recall that as we showed in the start of the year, the short 10Y and the long USD were the two most crowded, biggest consensus trades across the spec investor community, perhaps in history.

But while everyone got crushed on the Short 10Year trade shortly thereafter, the USD trade kept working... until Wednesday, when the entire groupthink monorail slammed into a brick wall.

So now what? Well, more of the same... and prayer.

The sharp swings also raise a now-familiar complaint from investors: Regulations brought in after the financial crisis have dried up the liquidity in markets, by crimping banks’ ability to carry risky bets on their balance sheets.

 

On Wednesday, the Bank for International Settlements became the latest major authority to caution that a lack of liquidity could lead to major disruptions in financial markets.

 

When flow hits the market, there’s no buffer, so it translates straight into big price moves,” said Mr. Lambert at Insight Investment. During the financial crisis, big swings were sparked by fears of a collapse of the banking system. Similar moves can now result from a minor reassessment of the Fed’s rate-increase plans, according to Mr. Lambert.

So to summarize:

  1. the stock market flash crash of May 6, 2010
  2. the Treasury bond flash crash of October 15, 2014
  3. and now the US Dollar flash crash of March 18, 2015

And all of this happening as the "market" is rising, and as of today, poised to set new all time highs.

What happens when the real selling actually begins, and what little liquidity exists even now, is completely gone. The answer? Exchanges will simply close down and refuse to open or satisfy any asset liquidation demands, indefinitely, until either the Fed can once again bailout the system, or when the US government finally makes the sale of any asset, illegal.

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Panic Mode's picture

Better get used to it.

Save_America1st's picture

We flash-crashed some "folks"...

notbot's picture

I swear I'm living in an Ayn Rand novel. A slow motion version. And it's so painful to watch because I know how the story ends.

JohnGaltUk's picture

Do you mean Atlas Shrugged?

Oldwood's picture

And we all are shrugging. The path is set. Just sit back hoping and praying that we are standing on firm earth when the quake begins.

Risk is on, regardless of what anyone says.

LawsofPhysics's picture

"Risk is on", yes, that's life, it's always on.  But why make matters worse by rewarding bad behavior and unleasing the unpredictability of real moral hazard?  No one escapes the latter...

Ham-bone's picture

That should be expected when the market is a certifiable, bona fide Ponzi...well, it's all a Federal Reserve propped up synthetic facade. 

Recent article details the mechanics of the Ponzi in the Treasury market.

http://econimica.blogspot.com/

LawsofPhysics's picture

So what Ham-bone, who is going to be the first to sell?  Especially in light of NIRP in the E.Z.

Do tell...

Gmpx's picture

Is USD still overvalued by 50%?

Say What Again's picture

The "Flash Crash" got its name from an order type, known as a "Flash Order"

Are there Flash Orders in the ForEx markets?

If not, this is not a Flash Crash.  It might be algo-induced, but its not a flash crash.

 

Also, the chart for the Swiss Franc is misslabelled. It should be USDCHF

maskone909's picture

all i want to know is how many primary dealers get to have their trades reversed, as opposed to the little guys who got stoped out and had to take it with no lubrication. 

permarig's picture

I guess this might be even the top for the USD trend.

As in, you never know, there were rumors recently about FX market maker(s) doing rigging in the NOK, EUR, WTI (a NOK driver to some degree) and now interestingly, it's the NOK that emerged as the biggest gainer against the USD in this charade.

In that sense, this recent drop to new lows and reversal could be a 'U turn' maneuver to make some room for the cronies for position adjustments.

Also looking elsewhere, e.g. at USD/JPY monotonically creeping back to the Dec 8 highs and flatlining just before the FOMC or John Key's personal insider trading vehicle, NZD/USD paintig a double bottom, and all this timely correlated throughout the whole complex looks indeed quite algo-y.

(Not to mention silver today which was obviously rigged for the good part of 2014.)

 

Ham-bone's picture

Laws,

the article I linked shows there is no "natural" buyer of Treasury debt any longer...but there is a perpetual synthetic bid that is likely to only get stronger.  And pretty sure it's the same to some degree across all "markets".  In essence, Japan, US, UK, EU etc. are all synthetically buying assets with printed money and permenantly removing these assets. 

What is clear is those nations with dollar trade surplus' are not putting those dollars back into Treasury's and instead into gold or other harder assets.  Perhaps they know something?

LawsofPhysics's picture

"What is clear is those nations with dollar trade surplus' are not putting those dollars back into Treasury's and instead into gold or other harder assets."  --  I am a simple farmer, but this is exactly what I have been doing as well.   My god, don't tell me that someone like me has become a financial guru.  We are truly fucked in that case.

hungarianboy's picture

The issue is those HFT desks. Sure it creates liquidity for their own. But in reality, they've killed most speculators and investors and now the whole market is nothing else but HFT desks. Nobody invests big time anymore because of this ponzi and everybody knows that it is a big ponzi. As long as these HFT is allowed, better trade with 1 thousands or 2 thousands not hundreds until they feel the pain them self and start killing eachother. Take away the money and let them eat eachother. If you don't do it, they will take your money within the next 2 years.

greyghost's picture

oh fuck the talking video ads are back on the hedge. what a shit way to run a web site!

Seek_Truth's picture

Use Firefox browser, and download the following add-ons:

Ad-Block Plus, No-Script, and Ghostery.

Problem solved.

willwork4food's picture

Had the same problem. Running windows, just installed Ghostery - ***POOF*** problem solved.

TruthBeforeAll's picture

That's the plan. The only way the morally bankrupt can find solace is by dragging as many people as they can down with them. They need to be able to say, "See, you're no better than me" when somebody else slips and falls into the cess pool in which they live every day. You see, when the corrupt can no longer find "happiness" in the the drugs, ill-gotten gains and sexual deviations, they find it in watching others stumble into the same traps that they are stuck in. And woe to those who recognize their error try to crawl back out, they are the enemy, and the morally bankrupt will actively sabotage their attempts to escape by calling them hypcrits. Guilt and shame are one of the most powerful weapons of the corrupt, and quite often good people are paralyzed by it after slipping and falling, and those who hate them know it, and that is all they want. The good to be paralyzed and the weak to fall. All so they can feel better about themselves and what they are doing.

A Nanny Moose's picture

Now an instruction manual for how to dismantle society. Soon to be a regarded as a history textbook.

Stackers's picture

What happens when the real selling actually begins, and what little liquidity exists even now, is completely gone. The answer? Exchanges will simply close down and refuse to open or satisfy any asset liquidation demands, indefinitely, until either the Fed can once again bailout the system, or when the US government finally makes the sale of any asset, illegal.

 

Pure prohpecy. It will go down in history as The Great Freeze

ThirteenthFloor's picture

"The Great Dark Freeze"

Fasten your seat belts. It still hurts at impact.

Sorynn's picture

We have graduated from A Brave New World into some evil combination of 1984 and Atlas Shrugged.

StupidEarthlings's picture

Stephen King?..

(buh -doom- psshh)

InjectTheVenom's picture

SE don't give up your day job     ;>)

yrad's picture

I would like to know this as well. Money doesn't go poof, so in any crash, be it assets, currency, or markets, who profits? We call them the money-changers but who the fuck are "they"!?!

Burt Gummer's picture

Don't trade with leverage...... or better yet, don't trade in these rigged markets at all, buy gold, silver and wait for the STHTF.

 

https://www.youtube.com/watch?v=gzwyZI_DKjM

ThirteenthFloor's picture

Yes. But it will be very dark for a while. Remember, PMs are insurance not investment.

Perimetr's picture

You ain't seen nothing yet

Finnman's picture

"What happens when the real selling actually begins, and what little liquidity exists even now, is completely gone. The answer? Exchanges will simply close down and refuse to open or satisfy any asset liquidation demands, indefinitely"

Well it's same in Europe. But luckily americans buy much :)

Glass Seagull's picture

 

 

HFT "beneficial liquidity" strikes again.

ZeroPower's picture

Some color: quotes to sell USD or CAD on my desk are usually 1bp wide (we need it to hedge equities overnight)

FX desks we're in constant chat with were trying to quote us a full 10-20bp that day right after the close. Insane.

Philo Beddoe's picture

Nice to be a market maker, eh? 

The niceyness is just getting started. 

Stoploss's picture

What does Jan have to do now that dollars are drying up???

Tsar Pointless's picture

<----Let it continue.

<----Get down to serious business and print physical FRNs like there is (and will be) no tomorrow.

LawsofPhysics's picture

I was hoping there would be a analysis of this "disturbance in the force", it is significant.  How many dollars would have to be sold to get this move?!?  Can someone, anyone answer this question?

Fun Facts's picture

It depends on market liquidity at the time, and at the time it happened it is usually low.

It could have been a lapse in the sense that maybe a fiber optic cable was down at the West Creek Operations center and the FED wasn't there to "provide liquidity" = match buying liquidity with a sell stop cascade for an instant.

Who knows...glitch in the matrix...Is't all a charade now anyway.

riot-police's picture

Actual paper dollars or computer zero's and ones?

Livermore Legend's picture

That is NOT the Right Question - in fact, that Question and the Answer is irrelevant.

The "Right" Question is What is Liquidity ?

True "Liquidity" is UNENCUMBERED CAPITAL.

To Fully Understand that, one needs to study The Law of Encumbrance.

Despite what many may think, Most Wealthy and Powerful Individuals do NOT have the Depth of Knowledge Necessary to do so.  Ergo, the Average Individual is clueless.

Knowledge is Power, and as you would say "Same as it's ever been".

But Knowledge requires PAYMENT of the most Valuable Currency of all:

TIME. 

Most want the Benefit, but are unwilling to pay up.

Many here on ZH and elsewhere rail against the Federal Reserve, thereby demonstrating that they indeed lack any understanding of "Liquidity" much less The Law of Encumbrance.

The Federal Reserve CANNOT create a SINGLE DOLLAR of Unencumbered Capital.

This is one of the Most Important things to Understand, to begin having a grasp of what is going on, and how it all plays out.

The Difference between "Liquidity" as the term is commonly used by Markets and Participants, and "True Liquidity" is quite vast, and is bouncing at its Outer Parameters.

THIS is what is Manifesting in various Instruments, and their seemingly illogical and extraordinary movements.

Thus, as I have said:  Trillions, NOT Billions will Permanently Lost by Current Rentiers.

The Primary Thing Wrong with "Tyler" et al., and most here is this:

It is BEANS, BULLETS AND US BILLS.

 

Usurious's picture

u talkin about debt-money vs debt free money?

hungarianboy's picture

Not much since liquidity dried up because of HFT. so one contract could have caused 1 pip move.

Winston Churchill's picture

Exactly why I wont take on any out of the money options.

The only way to win is not to play.If you are trading this market, make sure its only what you

can afford to lose, "cause you will sooner or later.

 

Everyone is lying's picture

Do I whistle Yankee Doodle Dandy or Ride of the Valkyries? 

 

 

Usurious's picture

one should be able to whistle both with equal enthusiasm.....

pickupthatcan's picture

Well Mr. Lowlife Trader, we have something in this territory called a Mizzura boatride.

Bam_Man's picture

I believe this is what is commonly referred to as "running the stops".

Also known as "shearing the sheep".

Oldwood's picture

Everyone knows there is no escape. Thats why they stay in. No place to go.