Flash crash in an OTC market: trading behaviour of agents in times of market stress

Florian Schroeder*, Andrew Lepone, Henry Leung, Stephen Satchell

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

Abstract

We examine the 21-minute flash crash in the spot rate for Pound Sterling (GBP/USD) in October 2016. During this period, the sterling price fell 9%. Proprietary data reported to the Financial Conduct Authority show that the round-trip costs of dealers are 60 times higher during the flash crash compared to normal times given liquidity constraints. Further, dealers reduce their trading volume to 1% of the level during normal times. This may be attributable to the collapse of the inter-dealer market during the crash, where dealers could only hedge 31% of their clients’ trades with each other.

Original languageEnglish
Pages (from-to)1569-1589
Number of pages21
JournalEuropean Journal of Finance
Volume26
Issue number15
Early online date8 Apr 2020
DOIs
Publication statusPublished - 12 Oct 2020

Keywords

  • Flash crash
  • OTC market
  • trading behaviour

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