Beware the Flash Crash
On Monday, while the UK was on a public bank holiday, a flash crash occurred at 9am UK time. The OMX Stockholm index fell nearly 7% in around 4 minutes!
What caused it?
A simple human error. A trader at Citi’s London desk made an error putting in a transaction and that sparked a 300 billion euros sell-off.
What made it worse?
It was simply the fact that many algorithms are also triggered by outsized moves. Sometimes that can mean either limit entries are quickly removed or that aggressive trend following algos keep adding to the move. Either way, automation exaggerates human error, so you get large outsized moves.
Be aware of a new market dynamic
This means that we can get sudden outsized moves in markets especially when market liquidity is low. So, the most vulnerable times for these kinds of moves are at the end of the US session, but before the Asian session gets underway. The other time is during holiday sessions like we had this Monday on a UK bank holiday.
What’s the takeaway from these flash crashes?
Well, these sudden flash crashes will decimate accounts that are using highly leveraged positions. Large leverage and disorderly moves equate to financial disaster. So, make sure your stop is in a logical place and that you are limiting your use of leverage.
Secondly, remember that if you suddenly see a very large move in an instrument during the ‘flash crash’ hours the normal reaction would be to fade the move. However, you need to make sure there is not a strong fundamental story underpinning the move and that it is a genuine flash crash. Of course, this depends upon you being in the right place at the right time, but nevertheless, it is worth being aware of.