A Look Inside The Pound Flash Crash: What Really Happened In Those 30 Seconds

Tyler Durden's picture

At just after 7 minutes after hour, whether 7pm on the east coast, midnight GMT or early Friday morning in Asian trading, pound sterling plunged by more than 6%, in the span of 2 minutes although the bulk of the plunge took place in just 30 seconds: from 7:16 to 7:46, when the market became "disorderly" in technical parlance, or in simple terms, broke. And since earlier today the Bank of England mandated none other than the BIS (specifically the bank's "Head of Foreign Exchange & Gold", Benoit Gilson) to explain what happened, here is a place to start trying to reverse engineer the latest flash crash.

For the best forensic analysis piecing together what happened last night, we go to Citi's Daniel Randall who tells the overnight story of the GBP, who also shows that the key pair involved in the selling was indeed cable... 

not EURGBP as some have speculated.

 

As Randall points out, while GBP interbank volumes when Cable sold off to below 1.20 overnight were comparable to those of the BoE rate decision on the surprise “hold” on July 14, 2016, the big difference was that GBP sold off to a low of 1.1491 traded, moving almost 10%, when it “only” moved 2% on the July, 14. What were the key liquidity traits seen?

Price difference between GBPUSD trades in the primary market is usually 1 to 2 pips, however overnight, we saw this spike to over 50 pips up to over 600 pips.

This means that individual trades were over 50 pips apart, e.g. 1.2500 given, then 1.2450 given as the next trade, with there being vacuums of liquidity in between.

This was driven by the very large bid/offer spread in the interbank market at the time.

The below chart shows trade price differences as well as primary market bid/offer spread which blew out to 10 big figures maximum

The chart underneath gives high resolution around the move, which occurred over 50 seconds.

The first 10 seconds of the move we have smaller quick price moves lower but after this we see the primary market go two big figures wide.

As Citi points out, we have seen this on several occasions in the past, think August 24, 2015, and "could be associated with the high frequency market making interest leaving the primary market."

Not could, is.

Net flows we saw during this time period were also important and were similar as seen during the USDZAR move in January and also on the pre-referendum overnight two big figure spike in GBPUSD. While the market was still “intact” as per the chart above, we saw a large retail net selling flow, which is probably associated with stop losses. Unfortunately, it would appear that these continue stopping out, no matter what the rate, which can create large volatility when two-way prices are no longer intact as shown in the red circle above.

 

As a whole, whilst retail were net sellers, we net overall buying interest of GBP, mainly from the leveraged segment.

As Citi concludes:

"as we can see, execution technique is key, blunt aggression into the market can cause large impact, but if one spaces out orders and treats liquidity appropriately, then one can achieve a reasonable execution."

Translation: stay the hell out of the FX market, and just wait for more such flash crashes to occur, either buying at the trough when the algo selling is exhausted, or shorting/selling at the top, then quickly take profits, rinse and repeat. As an earlier chart from Citi showed, you will have numerous opportunities in the months ahead to do just that.

 

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Sky flyer's picture

And there went the GD ramp at the London close and another sideways trading-gold hammering-Payroll Friday surge in the DOW. Fuck this shit....

BigJim's picture

People think FX is exciting, they should try "investing" in silver :-p

nibiru's picture

Stacking is easy, safe and since silver went down a bit - just another reason to add osme more to everyone's collection!

 

http://independenttrader.org/silver-my-favourite-asset.html

Stainless Steel Rat's picture
Stainless Steel Rat (not verified) nibiru Oct 7, 2016 2:52 PM

What happened is clear! MDB, explain to these people... It was all due to disappoval over Brexit like Bloomberg.com says.  Disapproval that was somehow synchronized within the same minute.  The British need to reject Brexit and realize that we are #strongertogether... /s

USisCorrupt's picture

Why even trade it?

When one can dump fiat dollars and aquire everything and anything while you still can.

I quit believing in these Make Believe Markets some time back.

Make it REAL 100%

PlayMoney's picture

thats a lot of pips. gladys knight must be hiring.

1980XLS's picture

Soros passed out and fainted when he heard about the latest e-mail hack, and did a faceplant on his keyboard with his ugly mug.

root superuser's picture

You still dont get it. Soros himself is making sure those emails get leaked.

firstdivision's picture

Looks like some swaps being suddenly unwound by a large institution that does a lot of business in the US EU and JP. Almost like a large financial institution that is trying to liquidate, but I'm at a loss as to who that could be.

Bay of Pigs's picture

"The first 10 seconds of the move we have smaller quick price moves lower but after this we see the primary market go two big figures wide."

Ten seconds? LOL...

asteroids's picture

Currency wars, with the USD against the world. Another bankster war. Yeah, this will end well.

hooligan2009's picture

had to put those sterling SNB profits somewhere! i am going back to amazon at 20.49 p.m. EST tonight- watch out!

big-data's picture

The spike that will bring the entire system down will be a UST interest rate spike. The biggest bubble in history is the one inflating right now, it is the sovereign bond bubble which sits under ~USD 1 quadrillion in interest rate and FOREX rate derivatives. This is a complete analysis of the biggest asset bubble in history and shows the bubble's vulnerability points by network analysis. When this bubble pops all the collateral supporting the leverage ratios of 25:1 in the TBTF banks and 100 to 300:1 for FOREX traders go vertical...  The popping of the bond bubble is a fait accompli.

 

https://medium.com/deepconnections/prevailing-gray-swans-7-september-30-2016-8c1df681fd52#.g3q3cc2io

hooligan2009's picture

bit out of date - the BIS had only 500 trillion in notonal with 14.5 trillion of market value

http://www.bis.org/publ/otc_hy1605.htm

still thats a lot of counterparty risk given JPM mv is $245 billion, db is just $18 billion, hsbc is $190 billion and GS is $72 billion for a total of just $520 billion - half a trillion

a 2% rise in rates on a duration of ten years for their ooks would result in a loss owed by a solvent green someone of the odd 300 billion dollars - DB and GS are probably toast.

 

junction's picture

All that is certain about this "crash" is that someone made out like a bandit in milliseconds.  Now, will the authorities blame this event on some kid making trades on his computer in his apartment in the basement of his parent's house? 

Raul44's picture

I think it was intentional and see it as an act of war. With first CHF spike I predicted long ago this will become more common. That aside, I dont mind. Every 10%+ discount I will gladly buy and dump their EUR and USD back to them in return.

Mtnrunnr's picture

This scares the bejesus out of me. In less than a second out markets could Realistically drop 50% because of these clown machines. The economic fall out would be unimaginable. All that economy would go into the hands of the first to leave the floor.

cheech_wizard's picture

And somewhere there is a hacker who is not content to just hack e-mails...

 

PlayMoney's picture

the vast majority will be mortimer duke

Lord Peter Pipsqueak's picture

The worlds fifth largest economy has its currency fall 6% in two minutes on no news =George Soros.

The UK government is going to get plenty more of this type of event until it ignores the BREXIT vote, going against the ruling elite never ends well. There is only ever one winner.

It just depends how much pain and financial repression they want to impose on the UK citizens before giving in.

GreatUncle's picture

If this is the case we should look to a better trading block in Russia and China.

Big Whoop's picture

Perhaps England could cut a deal with Merkel to relocate London's City jews to Palestine.

adonisdemilo's picture

Soros would be my bet.

Pissed off that part of his master plan failed.

Any way the old bastard won't last much longer, but we'll manage without him whether or not 

Panic Mode's picture

This is the work from those fucktards in Brussel. They want to make a statement to other EU countries who wanted to leave, this is the consequence. To do such thing, they must be scared and worry. 

I would say, please bring it on. You are not hurting us. You are helping us. More tourisms, more asian foreign students, more business.