Flash crash in an OTC market: trading behaviour of agents in times of market stress

Florian Schroeder, Andrew Lepone (), Henry Leung and Stephen Satchell

The European Journal of Finance, 2020, vol. 26, issue 15, 1569-1589

Abstract: We examine the 21-minute flash crash in the spot rate for Pound Sterling (GBP/USD) in October 2016. During this period, the sterling price fell 9%. Proprietary data reported to the Financial Conduct Authority show that the round-trip costs of dealers are 60 times higher during the flash crash compared to normal times given liquidity constraints. Further, dealers reduce their trading volume to 1% of the level during normal times. This may be attributable to the collapse of the inter-dealer market during the crash, where dealers could only hedge 31% of their clients’ trades with each other.

Date: 2020
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DOI: 10.1080/1351847X.2020.1748893

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