Reuters: FX flash crashes put regulators on alert

The increasing frequency of flash crashes in the $5.1 trillion-a-day foreign exchange market has regulators scrambling for answers. Bankers and policymakers agree that an industry-wide switch to machine-trading in FX markets is behind the frequency and severity of the price moves, meaning that further crashes are likely.

“The question is, is this a new normal, or is it a canary in the coalmine sort of thing?” said Fabio Natalucci, deputy director of the Monetary and Capital Markets Department at the International Monetary Fund (IMF). “We have seen the frequency of these events increase so this may be pointing to a major liquidity stress event coming at some point in the future.”

Natalucci said liquidity strains — market lingo for an insufficient number of buy and sell orders — were evident days ahead of a big crash and the IMF was creating a monitoring tool that might be able to predict when the next one was coming.

“Our pessimistic view is that this technology is going to become an increasing part of the FX market and we need to step up our monitoring,” a G10 central bank official said, declining to be named because he is not authorized to speak publicly.

Regulators aren’t pressing the panic button yet. Natalucci said there was no evidence that flash crashes so far had raised funding costs for firms or households and it made sense to study the problem before “rushing into enacting any regulatory responses”.

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