Black rhino jumping from the sky landing on the market

Some brokers always believe that the forex market is the most liquid one, but this does not mean that we are safe. Even in the forex market, emergencies and low trading volume happen all the time. In recent years, flash crashes in the forex market have occurred from time to time. Today, we will take you to review several flash crashes that have a great impact on the market.

Swiss franc event

A famous black swan event is the Swiss franc event. On January 16, 2015, the exchange rate of the euro against the Swiss franc depreciated sharply. There was a 13.8% fall in the Swiss franc against the euro, and the Swiss franc to US dollar exchange rate soared by 39%. On the 16th, countless capital fund companies and individual investors liquidated their positions. Many investment companies that used hundreds of times leverage to hold euros or short-sell Swiss francs went bankrupt on this day, and the entire forex market was full of grief. The sudden collapse of monetary policy this time was due to the Swiss National Bank's abolition of the long-standing measures that aimed to maintain the domestic currency exchange rate and to decouple the euro. Such an action triggered an unexpectedly large increase in the Swiss franc exchange rate in a short time. In fact, in order to prevent losses from exceeding the controllable range, investors and trading companies often set automatic buy or sell orders to prevent major fluctuations in exchange rates. However, the surge in the Swiss franc exchange rate happened so fast that everyone tried to close the transaction at the same time, resulting in a serious lack of market liquidity. Many market makers stopped liquidity supply, and investors and trading companies were unable to execute Trading. So the related losses had also spiraled upwards, and the euro had been “swamped.”

The Swiss franc incident could cause such a huge impact because it happened without any warning nor notification and because it was announced at a time when market transactions were relatively inactive. Two days before announcing the abolition of the exchange rate ceiling, Jean-Pierre Danthine, deputy governor of the Swiss National Bank, also vowed to say that the exchange rate ceiling measures were the “pillars” of his policy. The Swiss franc incident has taught us a lesson about the dangers of being optimistic for no reason and trusting others' promises easily, especially when the trading volume is relatively low.

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