The euro surged as much as 1.6 percent against the dollar in the Asian morning Friday as a rush of computer-generated orders caught traders off guard.

The sudden move started under $1.05 and algorithmic orders snowballed above that level, causing what little liquidity there was on the year’s last trading day to vanish, according to foreign-exchange traders. In minutes, Europe’s single currency jumped to a high of $1.0653, forcing some dealers to take losses to cover positions.

And

“It could be stops taken out in thin liquidity,” said Simon Pianfetti, a senior manager at the market solutions department at SMBC Trust Bank Ltd. in Tokyo. “But it’s still a big move.”
An hour later, the currencies had pared gains and traders were swapping stories on who had come out ahead in dealing rooms. The euro was up 0.5 percent as of 6:14 a.m. in New York, while the franc was 0.4 percent higher. The yen had flipped to a 0.3 percent loss from a 0.4 percent advance.

The sharp move in the world’s most-traded currency pair punctuated a year that’s seen several unexpected moments of extreme volatility, most notably the pound flash crash in October. Again in early Asia time, the British currency dropped more than 6 percent against the dollar in two chaotic minutes, exacerbated by a rush of computer-driven sell orders amid thin liquidity. There is concern that such price swings will become increasingly common, with Boston-based consultant Aite Group estimating algorithmic transactions have more than tripled in the past three years.

 

Eoin Treacy's view

Algorithmic trading systems have proliferated in an environment where computing power has reached the speed required to support the ambitions of traders. Ultralow rates and massive availability of liquidity have lent fuel to these kinds of programs. The result has been a marked uptick in market specific volatility where programs can profit from what I consider “stops arbitrage”. In much the same way that prior program traders found disparities in pricing between different exchanges, current programs can fish for stops around psychological levels.  

The Euro has surged higher on three occasions since early November only to reverse intraday leaving long tails on the candle charts. This signals ample sellers above the market using rallies as opportunities to liquidate positions and increase shorts. On the two previous occasions rallies have quickly been reversed and new lows posted. If today’s move is to change that pattern the low at $1.0350 will need to hold.