A Clue to Solving the Yen ‘Flash Crash’ Mystery Uncovered

(Bloomberg) -- Retail investors in Japan slashed their net long positions in the Turkish lira on Thursday, according to data from a trading platform, offering a clue to the mystery behind the flash crash that had sent the yen soaring against every currency in the world.

Individual investors cut their net lira long positions by 42,743 contracts on Thursday, the most since August, according to data from the Tokyo Financial Exchange Inc. The contracts were worth 427 million lira ($80.1 million), though it's unclear whether the sales sparked the lira's decline of as much as 9.2 percent against the yen, or happened after the wild gyrations triggered loss-covering.

Traders and investors have been seeking to piece together what happened early Thursday morning in Asia when a flood of orders to sell Australia's dollar and the lira against the yen overwhelmed market makers on a day when Japan was shut and liquidity was thin. While some pointed to risk aversion after Apple Inc. cut its sales outlook, others have suggested that Japanese retail investors were bailing out of loss-making positions.

The Turkish currency had slumped more than 7 percent against the yen since the end of November to Jan. 2, while the Australian dollar had dropped more than 8 percent versus Japan's currency over the same period.

“Liquidity issues likely played a role, but the underlying drivers were fundamental,” according to a Jan. 5 note by analysts at Goldman Sachs Group Inc. “We think the dollar-yen flash crash and its aftermath show that the market is going through a bumpy adjustment to new demand dynamics.”

The data from the Tokyo Financial Exchange showed retail accounts barely touched their Aussie net long positions. The dollar was the largest beneficiary of the lira sell-off, with Japanese investors increasing their net long positions by 12,631 contracts on Thursday. The euro, New Zealand dollar, pound and Swiss franc also received inflows.

To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net

To contact the editors responsible for this story: Tan Hwee Ann at hatan@bloomberg.net, Liau Y-Sing

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