The October 2016 Sterling Flash Episode: When Liquidity Disappeared from One of the World's Most Liquid Markets

30 Pages Posted: 9 Nov 2017

See all articles by Joseph Noss

Joseph Noss

Bank of England

Lucas Pedace

Bank of England

Ondrej Tobek

University of Cambridge - Faculty of Economics

Oliver B. Linton

University of Cambridge

Liam Crowley-Reidy

Bank of England

Date Written: October 27, 2017

Abstract

This paper provides an in-depth analysis of the evolution of liquidity during the flash episode in sterling during the early hours of 7 October 2016. It examines a number of estimates both of the cost of trading, and the price impact of executed transactions. These include a variant of the ‘volatility over volume’ measure of liquidity based on transaction data, which provides a better proxy of illiquidity — as given by measures based on high-frequency limit order book data — than other summary measures of price impact. The paper also shows that the fall in the value of sterling during the initial part of the flash episode was consistent with the estimated impact on prices of a large number of individually small — but in aggregate large — volume of orders to sell sterling during a normally quiet period of the trading day. However, the subsequent change in price was larger than that consistent with the estimated impact on prices of observed orders to sell sterling. This might support the suggestion, which was included in the report on the episode provided by the Bank for International Settlements, that the move in sterling may have been amplified by the pause in trading on the CME futures exchange.

Keywords: Flash Crash, Foreign Exchange Market, Liquidity, Price Impact

JEL Classification: F33, F37, G01, G12, G15

Suggested Citation

Noss, Joseph and Pedace, Lucas and Tobek, Ondrej and Linton, Oliver B. and Crowley-Reidy, Liam, The October 2016 Sterling Flash Episode: When Liquidity Disappeared from One of the World's Most Liquid Markets (October 27, 2017). Bank of England Working Paper No. 687. Available at SSRN: https://ssrn.com/abstract=3066841 or http://dx.doi.org/10.2139/ssrn.3066841

Joseph Noss (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Lucas Pedace

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Ondrej Tobek

University of Cambridge - Faculty of Economics ( email )

Sidgwick Avenue
Cambridge, CB3 9DD
United Kingdom

Oliver B. Linton

University of Cambridge ( email )

Faculty of Economics
Cambridge, CB3 9DD
United Kingdom

Liam Crowley-Reidy

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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