A mechanism such as the Futures market perhaps? - they have equity ‘circuit breakers’ when price moves 5% over night. Normal trading hours include 7%, 13% and 20% down limits.
- This is how such circuit breakers actually operated on the CME Futures market with the above GBP/USD flash crash…
(a) 00:07:15 BST: sharp price movements over a two-second window trigger a velocity logic event which pauses trading on the CME for 10 seconds.
(b) 00:07:29 BST: the futures price reaches its lower limit of 122.17 (based on the change on the day). The exchange remains open, but transactions cannot take place below this price on the CME. A two-minute monitoring period begins.
© 00:09:29 BST: as the futures price has not rebounded from the lower limit by the end of the monitoring period, a further two-minute trading
halt is triggered on the CME. At 00:11:29 BST, the exchange reopens with a new (lower) price limit.
(d) 00:11:57 BST: a second velocity logic event is triggered by sharp price movements over a two-second window, again pausing trading for 10 seconds
Sources: Bank of England calculations; CME; Bloomberg.
The above chart shows a 9% flash crash during the early Asian session.
The event can be split into three distinct phases. First, the early phase of the
move, during which sterling depreciated rapidly from 1.26 to around 1.24 against the
dollar in response to significant selling flow, but in an orderly fashion and with broad
participation on key venues. Second, a period of a number of minutes of extreme
dysfunction during which sterling fell further, rebounded and then traded in a wide
range. This phase involved lower volumes and narrower participation, pointing to a
greater role for the actions of individual market participants as a driver of the sharp
moves. And finally, the gradual recovery in market liquidity over the hours that
I’ve always been a fan of applying a 5% circuit breaker in FX - but we know this just isn’t possible, not to mention the fact that FX is not a centralized market.
So yes, I would most certainly want to use a SL in this case, regardless of it being honored (which it wouldn’t be in this case) - lets at least try to minimize the hemorrhage of bleeding?
The below report may be of some interest from the Bank of International Settlement (BIS). It clearly illustrates how no SL would have been honored due to an outrageous decline in market liquidity. Ironically as retail traders we don’t even hit the real underlying market, we just bet against the broker, but I can also bet your last dollar that the MM brokers would mirror the LPs.
To add, the report also touches on Twitter news feeds - a key focus area that gave cause [one of many] to the flash crash due to social media algorithms short selling GBP/USD; after this occurred the short selling kicked in from all institutions causing the biggest flash crash we’ve seen in recent times in one of the most liquid, highly traded and supposedly stable major FX pairs… GBPUSD Flash Crash Report 07_10_2016.pdf (548.0 KB)
So? You still don’t want to use a SL - I’ll allow you to decide