Gold Options Flash Crash?

That's right, it kind of happened. But ask people who trade gold options, and they might not even know about it. That's because you didn't see the entire market collapse, but one strike in particular did. Here's what happened.

Yesterday was March Gold options expiration. An hour or so after the open, gold was trading 1775. The March 1775 calls were worth approximately $5.50 (11 dollar straddle). This strike started to go in size in one lots. As I looked at the prints on my screen I immediately knew something was wrong. On the same strike, with nothing changed, I saw successive prints trade 5 dollars and then trade 10 cents. A minute of staring at my screen later, I realized I was seeing what I thought I was. How is this possible?

It isn't rocket science. If you put in an order in enough size without a limit on it, you will sweep the market until you take out all of the bids. If there aren't sufficient bids to accommodate a market sweep order, then a bid at say..... 10 cents, will get hit. And that is likely exactly what happened. Now how is it possible that 10 cent prints were going in literally the same second (though not at the exact same time) as 5 dollar prints? Machines will quote both sides of the market, lets say 4 tics wide. If these quotes refresh every half second, and the sweep order is offering every quarter second, there might be no legitimate bids outstanding. Some people leave resting tic bids out there, just in case such a scenario takes place. When there is a seller at market, and the only bid is at 10 cents (1 tic) that's where they'll trade. 

Remind you of how Proctor and Gamble was down 37% in a matter of minutes on no news? The flash crash was not due to anything mystical, but rather a lack of buying interest and stop market orders getting triggered. While noticed by few, gold options march 1775 calls were just another example of how readily such an event can take place.