Category Archives: Flash Crashes

Reasons for Flash Crashes: Example Dax Future February 6th, 2014

Certain market participants believe that short sharp corrections, aka a Flash-Crash, are caused by ominous or secretive algorithms.

The action in the Dax Future on February 6th is an example that the F.A.Z. sees as a Flash-Crash, – even though the exchange was quick to point out that they wouldn’t describe it like that.

If you take a close look at what the reason for this ‘Flash-Crash’ was, it boils down to simple supply and  demand dynamics being misjudged by certain market participants during news events. Ahead of a central bank interest rate decision every market maker goes cold on his bids and offers (or widens them massively) so as not to be exposed to surprise news.

Now if you have certain market participans who put in large conditional orders for the moment the news hits their large sell or buy orders will hit an air pocket, i.e. hit a half empty order book with spreads that are unusually wide in comparison to regular trading.

It’s the same in the forex market, just on much smaller % changes. I guess one or two market participants learned this lesson on February 6th.

The fact that even the arbitrage between cash and futures market failed for a short while shows you that the basket execution for hedging the Dax Future isn’t available in any size at every time.

Flash-Crash-Dax-Future-February-6th-2014

 

The above article scan is from the F.A.Z. newspaper (Frankfurter Allgemeine Zeitung)