Finance Monthly October 2019 Edition

44 FINANCIAL INNOVATION & FINTECH - ALGORITHMIC TRADING here are some hedge funds, however, that exist purely for the purpose of tail risk hedging and this creates consistent demand for various derivative products which in turn effects their pricing in the market. Since the 2008 financial crisis, there have been a number of ‘tail events’ which some market commentators say have been happening with increasing frequency across multiple asset classes. Some examples of such extraordinarily volatile events include, 2010 SPX Flash Crash, 2015 EURCHF peg break, GBPUSD on 2016 Brexit Referendum, 2018 VIX ETN blow up and Summer 2018 Italian BTP 2Y yields spike. A potential cause of this apparent increase in ‘Black Swan’ events might be the amount of central bank liquidity being poured into certain markets, distorting the market structure and encouraging many liquidity providers to stop taking risk or move into other products or asset classes. Consequently, when a real market-moving event occurs, the distorted asset will gap in price due to the lack of market makers with sufficient balance sheets or risk appetite to absorb any natural volatility. ‘Flash crashes’ are another type of tail event. Stocks, bonds, or commodities may all fall victim to “flash crashes” where their value rapidly plummets before suddenly recovering. They are a phenomenon that is not fully understood but can be attributed to human or computer error. Risk management is an essential part of successful investing. Planning, knowledge and quick thinking can minimise risk, but will never eliminate it completely. Yet there are certain risks that occur so rarely, that contingency measures are seldom made for them by the majority of investors, despite their huge impact on financial and economic markets. The technical term for such a happening is called a “tail event”. Quantifying the “tail risk”, the risk of such an event taking place is difficult due their rarity and the fact that they are normally triggered by unpredictable shocks. HAS THE RISE OF ALGORITHMIC TRADING INCREASED TAIL RISK AND THE FREQUENCY OF FLASH CRASHES? Imran Lakha Senior Advisor, Vanguard Capital AG & CEO and Founder of Options Insight, Financial Markets Training T

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