Flash crashes and why liquidity can disappear in a blink

[Amanhasnoname]

Occasionally, a currency pair drops or spikes dramatically within seconds, then recovers. The pound's move in October 2016 and the yen crosses in January 2019 are well-known examples.

They tend to happen when liquidity is already thin, such as Asian hours or holiday periods, and an unusual order or algorithmic reaction triggers a cascade. Stops trigger, more orders hit the book, and prices gap through several levels.

Retail accounts can suffer greatly. Stops fill at terrible prices, margin calls hit, and in some cases brokers cancel trades afterwards, claiming off-market prices.

Protective habits include never running accounts near full margin, avoiding trading in the thinnest windows with tight leverage, and keeping position sizes modest.

It's also worth reading the broker's policy on erroneous prices and trade cancellations. Some state that they reserve the right to cancel fills outside normal market levels, and this can work for or against a trader.

These events are rare, but one is enough to end an account.

After such events, brokers usually publish a statement. Reading how they dealt with clients, which trades they reversed and which they honoured, tells a lot about how the firm will behave next time something breaks.

Have you lived through a flash move, and what did you learn?