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Did CTAs Exacerbate the Flash Crash?

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Stockholm (HedgeNordic) – Several European stock markets suffered a so-called “flash crash” on Monday morning after a Citigroup trader made an error when inputting a sell order trade. Nordic stocks were hit the hardest, with the OMX Stockholm 30 Index dropping by as much as eight percent in just five minutes before quickly recovering most of the losses. Some market participants were quick to point the fingers at trend-following CTAs for exacerbating the flash crash with their algorithms and stops.

“The problem is not the mistake per se, but all the algorithms and stops that were triggered,” John Plassard, a director at Mirabaud & Cie told Bloomberg. “It shows the market is always vulnerable to human error and that algorithms and various CTAs are far too present in markets,” he elaborated, referring to the trend-following vehicles that use quick systematic orders to exploit market trends. Rotterdam-headquartered quant firm Transtrend went on to rebuff Plassard’s claim by saying that “pointing at the presence of CTAs lags substantiation.”

“This morning one of our traders made an error when inputting a transaction.”

“The role of Citigroup in this market disruption has been confirmed by Citigroup itself,” says Harold de Boer (pictured), who is responsible for research and development, portfolio management and trading at Transtrend. “It is very clear to us that the cause of this move in the market is a very substantial transaction made by a market participant,” said David Augustsson, spokesman for Nasdaq Stockholm. “This morning one of our traders made an error when inputting a transaction,” a Citigroup spokeswoman confirmed in a statement on Monday. “Within minutes, we identified the error and corrected it.” The error by the trader at Citigroup’s London desk triggered an abrupt sell-off across European stocks that briefly wiped out €300 billion of market value.

“Pointing at the presence of CTAs lags substantiation. We can only comment on our own presence. Transtrend did not sell any stocks in this flash crash. We only bought.”

“However, pointing at the presence of CTAs lags substantiation,” argues Harold de Boer. “We can only comment on our own presence. Transtrend did not sell any stocks in this flash crash,” he claims. “We only bought. Individual stocks like Hennes & Mauritz, Yara International, Maersk, Kone, UPM-Kymmene, Volkswagen and Solvay. As well as index futures like the Stoxx Europe 50, Stoxx Europe 600 Retail and Euro Stoxx Food & Beverage,” adds Transtrend’s Head of R&D.

Managing over $5 billion in assets under management, Transtrend made purchases with an underlying value of more than $11 million during the three-minute sell-off, according to Harold de Boer. “That may not be a huge presence, but most certainly not a market disturbing presence,” he emphasizes. “We consider offering liquidity an important role of responsible investors. We take that role seriously.”

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Eugeniu Guzun
Eugeniu Guzun
Eugeniu Guzun serves as a data analyst responsible for maintaining and gatekeeping the Nordic Hedge Index, and as a journalist covering the Nordic hedge fund industry for HedgeNordic. Eugeniu completed his Master’s degree at the Stockholm School of Economics in 2018. Write to Eugeniu Guzun at eugene@hedgenordic.com

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