Robots to spark next financial meltdown

THE next financial crisis will be triggered by sudden market crashes as robot trading systems malfunction and cause uncontrollable sell-offs, JP Morgan has warned.

In a report on the risks faced by markets, analysts at the Wall Street bank highlight previous so-called flash crashes where computer programs which trade automatically launched a wave of selling.

The study claims these flash crashes could become more and more frequent as trading is increasingly dominated by machines – leading to sudden moves that could be impossible to predict.

Author Marko Kolanovic said investors have shifted around £1.5 trillion from traditional stock-picking funds to passive ones which aim to track the wider market using computers rather than beating it.

As a result when crashes happen there is less money available to traders who want to snap up cheap stocks and could halt a fall. It means that price drops could potentially go on for longer and be less controlled than in the past.

Kolanovic said: ‘Basically right now, you have groups of investors who are purely mechanical. They sell on certain signals and not necessarily on fundamental developments, such as simple price action – meaning if the market goes down 2pc, then they need to sell.

‘Suddenly, every pension fund in the US is severely underfunded, retail investors panic and sell, while individuals stop spending,’ he said.

He warned that if this turmoil drove markets down 40pc it could cause a severe depression and force central banks to step in.

Kolanovic said: ‘If they don’t manage to, then you’re spiralling into depression, social unrest and a lot more disruptive changes.’