On Friday, in the aftermath of the historic pound sterling flash crash, we presented Citi’s forensic take of how in just 30 seconds, bid/ask spreads in cable exploded as wide 600 pips.
Today, we provide another take, that of JPM’s Nikolaos Panigirtzoglou, who looks at the “gapping market” that emerged on Friday morning Asia time, and shares some color on the role of high frequency traders behind the sudden, dramatic plung in sterling.
Below is his full note:
Friday’s flash crash in sterling reinvigorates the debate about market liquidity and the role of High Frequency Traders (HFTs) as providers of liquidity. Similar to previous flash crashes such as the August 24th 2015 flash crash in US equities or the October 15th 2014 flash crash in USTs, market gapping, a step change in prices from one level to another without much trading in-between, raises questions about market structure and liquidity in FX markets. This is also because FX markets are perceived to be a lot more liquid than equity or bond markets, so the conventional view is that FX markets are unlikely to experience flash crashes or market gapping in the absence of high impact news.
This post was published at Zero Hedge on Oct 9, 2016.