The Swiss franc swooned almost 1 percent at the start of Asian trade Monday as thin liquidity caused by a Japan holiday led to a mini recurrence of the “flash crash” that roiled FX markets early last month.

The Swissie slid from 1.0004 per dollar around 7 a.m. in Tokyo to as weak as 1.0096, the lowest since November, within a matter of minutes before almost as suddenly reversing the move to trade 0.2% stronger on the day. The round trip created a trading range for Monday of almost 110 pips, about double this year’s daily average of 56.

The move was a smaller cousin of the whiplash that saw the yen jump almost 8 percent against the Australian dollar early on Jan. 3, when Japanese markets were nearing the end of a week-long New Year holiday break. A spokesman at the Swiss National Bank declined to comment on the franc’s drop on Monday.

“Lack of liquidity is a common factor in these events,” said Rodrigo Catril, a senior foreign-exchange strategist at National Australia Bank Ltd. in Sydney. “Traders and strategists now have Japan holiday calendars printed in a big font at their desk!"

 

Eoin Treacy's view

Currency markets are generally very liquid so when we witness two major moves in the space of a month, both tied to illiquidity around Asian trading that tells us there is a lot of money chasing a very specific type of trade. Generally speaking it is only through the use of algorithms that these inefficiencies can be spotted and by now everyone knows to watch Yen crosses during Japanese holidays.

At David’s funeral on Friday David Brown, Iain Little and I could not help but be distracted by the question of AI and how it is likely to affect markets. David Brown is busy with his new company applying algorithms to cancer treatment and is hopeful of success as they move to clinical trials. He expressed curiosity about how effective such methods would be in financial markets.

My belief is that in financial markets first mover advantage is the most important aspect of artificial intelligence. The way markets work is to iron out inefficiencies over time. When people like Stanley Druckenmiller state the tools they used to rely on no longer work, that means the inefficiencies they relied out have been ironed out, the market has changed or both.

Today we have seen risk parity, high frequency trading and artificial intelligence become highly successful strategies while traditional long/short strategies have underperformed. That suggests the market has moved on and is now quickly ironing out inefficiencies identified by big data analysis. The exploitation of holidays in various countries is an old trick which is only likely to be exacerbated by more money pouring in.

The next big avenue of discovery for financial markets, cryptography, artificial intelligence, deep learning and science generally will be quantum computing. IBM is on the cusp of delivering a market ready version of a quantum computer and the first fund to successfully deploy it in markets will gain first mover advantage.