'Flash' events hurt market liquidity for days: N.Y. Fed blog

[August 18, 2015] NEW YORK (Reuters) - Excessive price moves and reversals in a span of minutes, also known as "flash" events, have hurt liquidity in the stock, bond and currency markets for days, according to a New York Federal Reserve blog released on Tuesday.

Fed analysts Ernst Schaumburg and Ron Yang used an example from each of market in recent years to show the common characteristics of an event in the absence of fundamental economic news where price changes that would typically unfold over days occur over several minutes.

Traders have raised concerns about how easily a stock, bond or currency can be bought and sold as tougher capital rules have it less profitable for Wall Street dealers to trade them.

Schaumburg and Yang studied what happened in the U.S. Treasuries market on Oct. 15, 2014; the stock market on May 6, 2010; and the euro on March 18.

In all three cases, prices in the 10-year Treasuries note <US10YT=RR>, S&P 500 e-mini contracts <ESc1> and the euro moved at least three times more than their daily average in 10 minutes or less and reversed much of their moves almost as swiftly.

The market depth or order book after each of these events took days to recover, Schaumburg and Yang said.

"The three events had persistent, negative impacts on market liquidity," they wrote. "Order book depth was substantially reduced during the days following each event, taking up to a week to return to pre-event levels."

Among the three cases, the Treasuries market showed the greatest continuity, with more trades occurring at every price during the initial move and the subsequent reversal, they noted.

The three events shared similarities in terms of trading infrastructure, key players such as large bank dealers and propriety trading firms, market structure and "the substantial presence of automated trading," they said.

Tuesday's post, "Liquidity during Flash Events," is the second of a six-part series that looks at the "evolving nature of market liquidity."

(Reporting by Richard Leong; Editing by Lisa Von Ahn)

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