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Sterling flash crash (2016)

The sudden collapse in GBP/USD during the early Asian session of 7 October 2016, which took the pair several percent lower within about two minutes before most of it was recovered.

The move began shortly after midnight London time, the thinnest part of the trading day, described under holiday-liquidity and the session handover. Quoted lows differed markedly between venues and brokers, with some platforms printing far lower than others, because there was no single consolidated market to reference.

Subsequent official analysis pointed to a combination of factors rather than one cause: very thin order books at that hour, automated execution reacting to falling prices, stop-loss orders clustered below round numbers, and hedging related to option barriers. No single erroneous trade was identified as the trigger.

The lasting lesson is about time of day. The same order in the london-session would have met a book many times deeper. Executing size, or leaving stops, in the quiet hours means accepting a much wider distribution of possible fills.

Example: a stop at 1.2500 on 1 standard-lot fills at 1.1800 in the vacuum. That is 700 pips of slippage, about $7,000 more than the intended loss, on a position that was flat again within ten minutes.

Related: holiday-liquidity, slippage, asian-session, cable

See it drawn

Original diagrams for the ideas on this page. Illustrative, not real market data.

Slippage on a market orderA buy order clears four price levels, so the average price paid is worse than the price first quoted.Buy 1,000 shares at marketpricesell orders resting (bar length = size)20.04300 shares20.03200 shares20.01200 shares20.00300 sharesnothing resting at 20.02order sweeps up the bookaverage fill 20.02SLIPPAGE0.02 a share$20.00 in totalintended 20.00Each level fills at its own price; the average is what you really paid.
Slippage on a market order. You click at 20.00, but only 300 shares are resting there, so the rest of the order fills at 20.01, 20.03 and 20.04. The average price paid is 20.02, and that two-cent gap is slippage.
Bid-ask spread in an order bookSell orders stacked above buy orders with a gap between the best of each.SELLERS (asks)50.0690050.051,40050.0460050.011,10050.002,30049.99800spread = 0.03BUYERS (bids)
The bid-ask spread. Buy orders sit below, sell orders above, and the gap between the best bid (50.01) and best ask (50.04) is the spread you pay to cross. Bar length shows the size resting at each price.

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