Those trading equity indices using high leverage were closed out of positions on the way down.
Tuesday's trading produced one of the oddest one-day price charts for the Dow Jones and S&P500 indices ever seen (see below). At about 1:07 EDT (New York time) an AP tweet stated "Breaking: Two Explosions in the White House and Barack Obama is Injured." That tweet, coming from the official @AP Twitter account, sent US equity markets into a rapid tailspin, falling 1% almost instantly.
When it was revealed just several minutes later that AP's Twitter account was hacked (by a supposed pro-Bashar Assad group) called the Syrian Electronic Army, and that the tweet was a fake, the equity markets immediately recovered all the lost ground, and continued on their merry way toward what turned out to be a very nice day, with the Dow up about 1% overall.
But beyond being an interesting conversation piece, the flash-crash-and-recover did have a very real impact on Forex traders. While the main FX rates and Gold and Oil prices barely budged, many retail FX traders having a leveraged long position on the main equity indices either hit "Stop" sell prices on the way down, or were closed out outright if -- even temporarily, as it turned out -- the drop in the Dow reduced them to zero equity in their accounts.
CFDs on the main global equity indices are the most popular products traded at retail FX brokerages, after the main FX pairs, and Gold and Oil. And on a day like Tuesday, when the equity markets had been heading up steadily, many retail FX traders joined the "momentum trade" and opened long-Dow and long-S&P positions, only to be closed out during the tweet-induced flash-crash.
The result? Likely a banner day for market makers.
For more on the global FX market see the LeapRate Dow Jones Forex Industry Report.