It is a question that many who work on the financial markets ask themselves every now and then, what is a Flash Crash?
On Monday, May 2, 2022, a Flash Crash was triggered (some sources such as Bloomberg say a Citi group error) on the European stock exchanges in particular that of Stockholm passing through the German Dax.
I have already talked about Flash Crash in my chapters regarding high-frequency trading, you will find them in my blog and I invite you to read them carefully to understand how some situations are triggered on the financial markets.
The first time I heard about Flash Crash was on May 6, 2010 when Wall Street in a few seconds / minutes the indices suffered major losses, from that day instead of focusing only on technical analysis I started to follow other types of analysis such as that of order flow.
These studies that I continue to deepen have opened me to the world of high-frequency traders, the phenomenon of May 6, 2010 and May 2, 2022 belong to this category, to give a simple example if a high-frequency trader clicks on the sell button and issues an important sell order, almost automatically the other high-frequency traders will go after this order causing a collapse of the financial markets.
Fortunately, the Flash Crash is a fairly rare event but those who invest in the market must be aware of what it is, this phenomenon consists of a vertical fall in the prices of an index for example or stocks which then follows a strong recovery in the following seconds or minutes.
Volatility (as a result of the event) soars because the markets seem literally crazy and the algorithms no longer know which way to go but to follow other algorithms. As I have already written in the various chapters on high-frequency trading, the continuous development of increasingly powerful algorithms can lead to financial instability that affects all financial markets globally.
Someone will surely write to me, how can we defend ourselves from Flash Crashes?
It is mathematically impossible to predict such a violent event, May 6, 2010 was not an isolated case, there were several Flash Crashes for example May 18, 2012, August 22, 2012 and August 24, 2015.
What if when I open a position I always put the stop loss?
I answer with a simple question, do you know the word “slippage”?
It is the difference between the executed price of an order from the opening price entered in the order. There is a slippage when the market has quite violent movements such as to create a reverse situation with respect to the one we have opened with our order, the broker will execute but the original price chosen by us will no longer be available.
I want to ask a question to the people who are reading my articles, according to your point of view in finance situations happen randomly?
Do you really believe agencies like Bloomberg or Reuters or the SEC that tell us retail investors that it was simply a mistake caused by a wrong “click”?
If you think this my advice is to find another job, the financial markets are not for you.
The financial markets have their own dynamics (inflation, interest rates …) but they are always looking for balances and when they do not find them they violently reverse in a few seconds / minutes, on the Dax if you look at the 1-minute chart there was a very important “volumetric vacuum”.
I conclude this article on the Flash Crash by emphasizing that these situations do not happen randomly but are wanted by the “sharks” of finance, high-frequency traders or George Soros little changes knowing the culprits, the most important thing is to look at the financial markets from different angles to try to limit losses and increase gains.