A flash crash in the price of gold today is being blamed on everything from a “fat finger” event to price manipulation and high frequency trading (HFT), but are other issues being overlooked?

Gold

Gold drops $30 in seconds

The price of gold traded on the Comex dropped $30 per once in a matter of seconds today as 4,200 sell orders hit the electronic markets at 10:14 Eastern time, which triggered a 10 second trading halt, according to a price chart provided by Nanex and as reported on MarketWatch.

While the gold price crash is being reported in the media, a generally unreported flash crash occurred in the Treasury market on December 23, 2013.  In this event bonds had close to a six point rally in a matter of seconds.  Ultimately the CME Group Inc (NASDAQ:CME), the exchange where the contracts were traded, disallowed many of the trades.  It is unclear if Comex, which is owned by the CME Group Inc (NASDAQ:CME), is going to disallow many of the gold trades in question.

According to Eric Hunsader, founder of Nanex, the two flash crashes looked like a different algorithm was at work moving the markets. “The treasury market flash event took a relatively longer time to build (minutes).  The gold crash was a straight line down and occurred in milliseconds.”

Flash crashes and the electronic eye

Flash crash events typically occur when markets experience a flood of orders on one side of the market.  The most famous flash crash occurred May 6, 2010 when the Dow Jones Industrial Average lost over 1,000 points in a matter of seconds on enormous momentary sell orders.  Behind the scenes the crash was said to involve electronic market making software and an apparatus known as the “electronic eye.” The electronic eye is designed to detect abnormal market behavior and can pull bids and offers when the flow of orders becomes unbalanced. Increasingly discussions regarding high frequency trading techniques and potential market crashes are being spoken about relative to national security.  In November of last year the CME Group Inc (NASDAQ:CME) reported its technical infrastructure was hacked in Hong Kong and the FBI is currently investigating.

By Mark Melin