The increasing frequency of flash crashes in the $5.1 trillion-a-day foreign exc...
LONDON/NEW YORK - The increasing frequency of flash crashes in the $5.1 trillion-a-day foreign exchange market has regulators scrambling for answers.
“The question is, is this a new normal, or is it a canary in the coalmine sort of thing?” said Fabio Natalucci, deputy director of the Monetary and Capital Markets Department at the International Monetary Fund . Bankers and policymakers agree that an industry-wide switch to machine-trading in FX markets is behind the frequency and severity of the price moves, meaning that further crashes are likely.
The models are designed to execute trades smoothly by breaking down orders into small pieces and searching for platforms where liquidity is plentiful. The first of this year’s notable crashes came on January 3 when the yen spiked suddenly against the dollar after Tokyo markets closed. It jumped 8% within the space of seven minutes against the Australian dollar and 10% to the Turkish lira.
Human traders would be able to spot an opportunity from the market turmoil — buying a currency in free fall - which would help to defuse it. But these days there are far less of them around. “Moreover, banks have rolled back their proprietary trading desks due to the extra capital required and lower risk appetite.”Policymakers’ ability to understand and affect currency moves are hampered by the freewheeling nature of the FX market, which is unregulated, private and decentralized.
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