Flash crash fears cause forex players to innovate
The foreign currency exchange market is heavily dependent high-frequency, algorithm-based trading systems. These systems, which rely on complex calculations to trigger buying and selling automatically, are vulnerable to so-called “flash crashes.” In a flash crash, an unusual trade or mathematical malfunction can cause automated platforms to dump positions and send the market tumbling, inciting panic and market collapse. Now trading platforms, brokerage units, and a processing firm have teamed up to create a system meant to prevent flash crashes.
The new system, to be called Harmony CreditLink, will allow prime brokers to oversee their clients’ credit risk in real time. Should a flash crash form, the brokers would be able to suspend all trading activity until the problem was resolved.
Though forex markets haven’t experienced a major flash crash yet, the May 2010 Dow Jones flash crash inspired them to act preemptively. In London, up to 25% if forex trading is done on high frequency systems, which that could be thrown into a tailspin by a flash crash. Says Michael Irwin, a Morgan Stanley forex head: “The increase in high frequency and algorithmic foreign exchange trading has made the provision of adequate control and real-time risk management of critical importance.” “The foreign exchange market doesn’t wait for problems to occur before addressing them,” added Gil Mandelzis of Traiana. “There has been tremendous innovation in the foreign-exchange market, which has a tendency to not wait for regulators to force things upon them.”