Flash crash rocks pound
A DIZZYING “flash crash” of the British pound sent shockwaves across global markets already hyper-sensitive to Brexit issues on October 7 and raised fresh questions about the power of thinly-regulated program trading.
In a still-unexplained move, the pound plunged more than 6 percent against the dollar within minutes in Asian trading hours.
The currency fell off a cliff at 11:10 pm GMT on October 6 to strike a 31-year low at US$1.1841, before rebounding back above $1.2439.
The euro also hit a high against sterling at 94.15 pence. At 2100 GMT on October 7, it was at $1.2439, and at 90.01 pence on the euro.
Traders think that in today’s techdominated world, it probably had a lot to do with complex mathematical equations known as algorithms.
Automated trading systems can be set up to keep an eye on news headlines and react to potentially market-moving information.
Britain’s finance minister Philip Hammond downplayed the flash crash, blaming “technical factors” in the market. But Bank of England Governor Mark Carney has asked the Bank for International Settlements to look into the cause.
The pound’s plunge capped a tumultuous week of increasing market nervousness over Britain’s planned pullout from the European Union, which could deeply affect existing trade and finance relations and slow regional growth.
British Prime Minister Theresa May had said that she would trigger the process for Britain’s departure from the EU by the end of March.
That ignited a new round of verbal jousting over the terms of the break-up. French President Francois Hollande said the European Union should take a tough line with London during exit talks to prevent the breakup of the bloc.
Analysts saw Brexit at the root of the currency’s plummet. HSBC Bank’s David Bloom said the pound had become a “political and structural currency”.
“The currency is now the de facto official opposition to the government’s policies,” he said.
Berenberg bank analysts said the risks for the pound were “heavily tilted to the downside” and its path would be determined by “the noise about and the substance of ” the Brexit negotiations. –