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Earn Cash on Today’s Flash Crash?

 
Earn Cash on Today’s Flash Crash?
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More than fifteen hours ago as I was authoring today’s market commentary, the cryptocurrency market started to plummet as the US dollar gained monster ground across the board in a matter of minutes. I quickly realised I needed to update my levels, both in my commentary and my own real-world risk management.

My technically-savvy colleague, Jefe Caan, today referred to this as a “flash crash” so I will refer to today’s market violence using the same term.

As a veteran of capital markets trading, I’ve experienced my fair share of “flash crashes.” I’ve been on the right side of some of them and the wrong side on others of them. On 6 May 2010, there was a flash crash in the US market in which a trader named Navinder Singh Sarao reportedly wiped out about US$ 1 trillion in market value over 36 minutes using E-mini S&P 500 stock index futures contracts. That was one of the most acute moves I’ve ever seen or experienced.

Another major flash crash involving the Swiss franc took place on 15 January 2015 as soon as the Swiss National Bank removed its EUR/CHF floor at CHF 1.20. The central bank had been accumulating massive EUR reserves through actual market intervention to try to prevent EUR/CHF from moving below 1.20 in a long-standing bid to protect Swiss exporters like watchmakers, cheesemongers, and chocolatiers. Even SNB realised it cannot spend all those euro, apparently. That move was extra perilous because many spot foreign exchange positions are highly leveraged, sometimes as high as 200x or even 500x in the retail market.

On that crazy day with the Swiss franc flash crash – now called “Frankenshock” on trading desks (H/T Mary Shelley, who composed Frankenstein in Geneva in 1818) – EUR/CHF tumbled from 1.2008 to 1.0405 in less than 5 minutes and USD/CHF fell from 1.0219 to 0.8894 in less than 5 minutes.

Major FX firms and funds went out of business, had to be bailed out, and worse. Many traders and trading desks who earned decent bonuses for their performances in 2014 (but had not yet been paid or received their bonuses) saw their banks and institutions renege due to Frankenshock. Others fell into a P&L hole so deep in mid-January 2015 that they could not escape until 2016. Yet, others were on the right side of the trade for whatever reason and had career-defining moments. Seeing very liquid markets move 14 or 16 big figures in the bat of an eyelash is a true black swan event.

There have also been British pound flash crashes, Japanese yen flash crashes, and even “fat finger” flash crashes.

Coming back to today’s move, here is a quick recap:

BTC/USD: -$ 1,340.75 in 173 minutes
ETH/USD: -$ 44.70 in 174 minutes
LTC/USD: -$ 13.55 in 174 minutes
BCH/USD: -$ 71.35 in 142 minutes

BTC/USD, ETH/USD, and LTC/USD started to move sharply lower around 00:18 UTC but BCH/USD really did not start to move sharply until 00:49 UTC. All four pairs saw a bottom reached around 03:11 UTC.

Those 31 minutes were extremely important for arbitrageurs. From 00:18 UTC to 00:49 UTC, BCH/BTC moved from 0.05108 to 0.05192, a 1.64% gain in 31 minutes for eagle-eyed traders with quick reflexes and algo accounts that were able to execute and profit from the arbitrage opportunity before US dollar bulls finally had their way with BCH as well starting around 00:49 UTC.

It pays to watch those crosses at all times!

If you were able to source liquidity in less liquid crosses such as BCH/ETC, there were some good profits to be had, too. Good luck finding liquidity in BCH/LTC, mates.

Having lived through many of these types of violent moves, I think today’s move was straightforward. Some large accounts hit the market in size, knowing exactly where Stops would be elected, and knew exactly where momentum algos would be covering their Shorts.

Bearish momentum accounts who saw 7849.00 as a relative peak at 01:36 UTC sold and covered their Shorts around 7558.53.

Bearish momentum accounts who saw 7765.00 as a relative peak at 02:43 UTC sold and covered their Shorts around 7194.73.

Bearish momentum accounts who saw 7318.88 as a relative peak at 03:04 UTC sold and covered their Shorts around 6696.03.

After Shorts covered around 7558.53, the appreciation was 75.00 trough-to-peak and lasted only 3 minutes.

After Shorts covered around 7194.73, the appreciation was 165.03 trough-to-peak and lasted only 2 minutes.

On my chart in this article, Shorts were covered where you see the three red horizontal lines with red labels on the Y-axis.

Once momentum increased on the move downward, Bears basically let Stops get elected and do most of the heavy lifting from 7600.00 to 6600.00 over the course of about 11 minutes. Yes, that’s US$ 1,000.00 in 11 minutes.

There’s been a lot of chatter over the past several hours about whether there were fundamentals that caused the sharp gains in the US dollar. One theory is that the US dollar appreciated as traders reacted to news that the New York Supreme Court granted Bitfinex’s motion to modify an injunction from the New York Attorney General. This news effectively allows Bitfinex and Tether to continue normal business operations with the original injunction from the New York Attorney General said to expire in 90 days.

As a technician, I typically catch up on these headlines after the fact, but sometimes I keep my eye on the news wires during periods of volatility. As a chartist, I knew Stops were sitting below important technical levels including 6730.01 and 6677.81. These Stops hastened the move lower.

Similar reactions were seen in ETH/USD, LTC/USD, and eventually BCH/USD.

I hope this dissection and trade analysis helps you see today’s “flash crash” in an interesting perspective.

See you in a few hours.

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