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

Florian Schroeder; Andrew Lepone; Henry Leung; Stephen Satchell

doi:10.1080/1351847X.2020.1748893

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

Department of Applied Finance

Research output: Contribution to journal › Article › peer-review

3 Citations (Scopus)

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 language	English
Pages (from-to)	1569-1589
Number of pages	21
Journal	European Journal of Finance
Volume	26
Issue number	15
Early online date	8 Apr 2020
DOIs	https://doi.org/10.1080/1351847X.2020.1748893
Publication status	Published - 12 Oct 2020

Keywords

Flash crash
OTC market
trading behaviour

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10.1080/1351847X.2020.1748893

Cite this

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title = "Flash crash in an OTC market: trading behaviour of agents in times of market stress",

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{\textquoteright} trades with each other.",

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N2 - 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.

AB - 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.

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

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Keywords

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