Flash crashes typically blow through several standard deviations from the moving average and last less than an hour. They can move up or down; a drop in liquidity (traders) is a breeding ground for such crashes. With many fewer traders, dramatic short-lived moves can become extreme. Broad declines that take out support levels also fuel such crashes, along with after-market moves in foreign markets. When automated trading systems see this lack of liquidity or indicators that the move might be the result of a ‘fat finger” (trading error), the systems typically pull the plug, worsening the volatility.
Key Takeaways:
- There is debate over what contsitutes a flash crash, but extreme moves in very short time frame is a common feature
- GBP/USD dropped as much as 6 percent on some feeds in the span of minutes this past Friday
- We compare the Pound move to accepted flash crashes in 2010, 2013 and 2014 to find commonalities to avoid
“There is debate over what contsitutes a flash crash, but extreme moves in very short time frame is a common feature”
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