WTI crude 7% 'flash crash' puzzles market as prices quickly rebound
Quantum Commodity Intelligence – WTI crude oil futures briefly nosedived in early-hours of trading Thursday, on what was widely described as a 'flash crash' that saw the US benchmark plummet by around 7%.
Shortly after the opening in early Asia-trading hours, prices slumped by around $5 to a low of $63.64/b, according to exchange data, before quickly rebounding - suggesting the price action was a mishap or liquidation event, rather than a fundamental move.
For a price to fall by such a margin in a matter of seconds would typically take a huge price-moving headline, which would be felt across other markets.
Most financial contracts are either closed or seeing very low levels of liquidity at 6am Singapore time, but there were no ripples seen across other markets.
Suspicion was falling on a significant liquidation event, or a so-called 'fat-finger' mishap; for instance where the trader or broker enters a position to sell 2,000 lots rather than 200 – although there are meant to be several checks to prevent this from happening.
Additionally, only a significant player would have position limits to execute such volumes.
In theory, a trader offloading a large position in early-morning thin liquidity could trigger a sharp price correction, but there would be little incentive to sell potentially several thousand lots at a time when there are so few counterparties.
Liquidation
If it was a liquidation event, then it was likely to have been forced due to margin calls. But even then, it would make little sense to sell into a near vacuum and in the knowledge that trading algorithms would exacerbate any price move.
In a rare event, a clearer can immediately liquidate a position if the client cannot make a margin call, but even in those circumstances, a 'flash crash' lasting a matter of seconds looks unusual.
A clearing source told Quantum that typically a forced liquidation would be staggered to avoid crashing the market, but under an automated system the position could be liquidated immediately.
Jun23 NYMEX WTI was trading at around $69/b by 0730 GMT, versus Wednesday's close of $68.60/b.
In 2021, both Brent and WTI dived around $1.50/b in space of a couple of minutes on erroneous reports that the US had lifted sanctions on Iran, but prices quickly rebounded when US officials cleared up the confusion.
