CFTC Does Flash Crash Analysis

Andrew Busch, Chief Market Intelligence Officer for the CFTC
Andrew Busch, Chief Market Intelligence Officer for the CFTC

So-called flash crashes are not increasing, and these sorts of events are rarely caused by humans in US futures markets.

That was the result of analysis led by Commodities Futures Trading Commission (CFTC) staffer, John Coughlan, and he joined the head of CFTC’s Market Intelligence Branch, Andrew Busch, on Busch’s latest podcast.

Prior to joining Busch, Coughlan delivered a white paper on the subject entitled: “Sharp Price Movements in Commodity Futures Markets.

Coughlan said his research had three main conclusions:

1) neither the frequency nor the intensity of sharp price movements appears to be increasing over time

2) primarily linked to volatility, market fundamentals and news releases (NOT weakness or fragility in the US futures markets which would cause sharp price movements)

3) American Commodities markets are very efficient.

“They (US futures markets) incorporate new information really quickly and continue to be the premiere global discovery mechanism.” Coughlan further noted.

Coughlan said his research counters the conventional wisdom that high frequency trading has been a catalyst for many sharp price movements and that HFT has revealed market wide failures in American exchanges.

“Our research refutes that notion.” Coughlan said, at least for commodity exchanges.

The term “flash crash” first was coined after the May 6, 2010 event when the Dow Jones dropped 600 points in five minutes.

Other events which the research looked at included: the April 23, 2013, event when a fake Associated Press story was tweeted out claiming that the White House had been hit, October 15, 2014,when the Yield on the 10 Year US Treasury Bond fell from 2.2% to 1.86% and rebounded back within minutes, January 15, 2015, the Swiss National Bank (SNB) Event when the SNB removed an upper limit on the Swiss Franc causing the currency to increase 39% against the Dollar, and finally the British Pound Flash Crash which occurred on October 6, 2016.

Of the first conclusion- that sharp price movement events have not increased over the last five years- the research noted: “The first major finding is that there is no clear evidence of a widespread increase in the frequency of sharp price movements across sectors. The charts in Exhibit 3 below show the percentage of top 100 price movements that occurred in each year by sector and all sectors combined. For example, in the chart on the top left for the Ags and Softs sector, about 15% of the top 100 price movements occurred in the year 2012.

Frequency of Top 100 Price Movements by Year - Flash Crash Analysis

“If sharp price movements were increasing in frequency over time, meaning each year had more big moves than the year before it, one would expect the bars to get steadily larger from left to right, however that is not the case. Instead, the charts show significant variation in each year, but no consistent buildup or up-trend. Some contracts have seen more large moves in recent years, but there is not an across the board increase.”

Bureau of Labor StatisticsInstead, the research found that sharp price movements are very sensitive to news events: “News and market data releases are heavily traded events in financial markets. Many participants plan strategies in advance and deploy them immediately following the release of information based on whether or not the news or data is in line with expectations. Therefore, the third major finding, as DMO staff expected, is that news and market data releases are large drivers of sharp price movements.”

One regular news event cited with the monthly Bureau of Labor Statistics- or jobs- report- which occurs on the first Friday of each month.

“The large mass of activity around 8:30 a.m. is the monthly jobs report published on the first Friday of each month by the Bureau of Labor Statistics. We see similar clusters of activity in corn and wheat related to crop reports from the USDA (released at noon) and crude oil and natural gas related to the EIA’s weekly storage reports (released at 10:30 a.m.).” The analysis stated, noting other regular events which can drive sharp price movements.