Gold Flash Crash – Manipulation or Something Else?

Around 10:14 AM Eastern on Monday, gold plunged in a 10-minute window on heavy volume. Price quickly recovered amid speculation as to precisely what happened.
MarketWatch reports Gold market ‘flash crash’ explanations vary from ‘fat finger’ to ‘price manipulation’

Gold futures suffered a sudden, brief drop in prices early Monday on the Comex division of the New York Mercantile Exchange, with market watchers blaming the move on everything from a “fat finger” to trader liquidation to price manipulation.

According to Nanex, a trade of about 4,200 contracts sent February gold  GCG4 -0.07% tumbling by $30 an ounce on heavy volume at around 10:14 a.m. Eastern and triggered a 10-second trading halt. Prices fell from about $1,245 to around $1,215 an ounce in just moments. The crash came about 14 minutes after the release of U.S. factory orders and ISM services index data.

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Phil Flynn, a senior analyst at Price Futures Group, at first said the drop looked like it was due to a “fat finger,” then added there was speculation over a broker liquidating positions.

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Mark O’Byrne, executive director at GoldCore, said the “flash crash today had the hallmarks of price manipulation.”  Still, “as ever, it is nearly impossible to tell and could have been a fat finger trade or a large fund or bank liquidating a gold position.”

Meanwhile, Ross Norman, chief executive officer at Sharps Pixley, said that the move “looks to be shorts defending their substantial positions.”  But “some of us have doubts, which makes gold a steal at these prices,” he said. “In fact, [it’s] the cheapest insurance in town against economic difficulties.”

Now the real question is whether the U.S. Commodity Futures Trading Commission and exchange “will investigate and try to actually enforce its regulations,” said Brien Lundin, editor of Gold Newsletter.

“Apparently there was no investigation into the mid-April episode where gold contracts were dumped simultaneously to push the price through sell stops. Either position limits were ignored by the exchange in this instance, or there was collusion involved — either of which should have been investigated and exposed,” he said.

“I’m afraid that today’s spike downward is further evidence that the current regulatory regime isn’t working,” said Lundin.

Flash Crash Chart

Gold Flash Crash

Heavy Volume Surge

Note the heavy volume surge right at 10:14. Barchart shows close to 25,000 contracts traded in a 10 minute window.

One-Way Manipulation Highly Unlikely

In general, traders scream “manipulation” every time trades go against them. Perhaps some of them are. But traders never complain when trades spike heavily in their favor. Perhaps some of those are manipulation as well.

I assure you that manipulation is not a one way street. That said, manipulation in any direction is not a welcome thing.

In general, manipulations occur at illiquid times, such as the middle
of the night when trading is thin. Someone wanting to force the price of
gold lower (or higher) would likely try at that time. Thus, I tend to discount
direct manipulation.

Main Lesson

Whether fat-finger, manipulation, or computer initiated, those with stops near $1215 had them taken out (regardless of why the flash happened).

It’s increasingly difficult to trade with stops when this kind of action routinely happens. That’s the main lesson here, and no one commentated on it.

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