"Flash crashes" in foreign exchange markets are far more common than generally believed, a study by trading algorithm provider Pragma said on Thursday. The two-year study of some of the world's most traded currency pairs - including the Australian dollar, the euro, sterling and the Swiss franc.
"The main takeaway from this study is that these extreme market events happen far more often than we read about them," Pragma's chief executive, David Mechner, told Reuters. The study found the events were characterized by a large, fast price move followed by a swift reversal, along with a sudden and significant widening of bid-offer spreads.
Two examples that did make the headlines were Sterling's short-lived drop of nearly 10 percent last October in Asian trading, and the 30-percent jump by the Swiss franc against the euro after Switzerland's central bank abandoned its currency peg in January 2015. But many more were going under the radar, the study suggested.
Using statistical analysis of five-minute price episodes over 2015 and 2016, Pragma was able to isolate 69 such incidents, over the time of its study - on average more than once every two weeks. "This is going to be more of a reality of the trading environment in the coming years," Pragma's Mechner said.
The crashes share some common characteristics: trading via central limit order books, a high degree of proprietary trading activity and a greater degree of price discovery, the Bank of International Settlements, said in a report earlier this year. Flash crashes have so far been short-lived, with no lasting consequences for financial stability. But regulators have warned the events could undermine market confidence if they increase in frequency or last longer. A retreat from market-making activity by global banks under regulatory pressure, the rise of algorithmic trading and automated trading decisions of client orders in thin markets have all contributed in such incidents, the BIS said.
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