Lack of ability behind crash
Badly managed automated computer trading platforms and inexperienced Asian-based currency traders helped drive sterling’s flash crash in October, a report has found.
The pound’s 9% plunge against the US dollar in the early hours of October 7 was the outcome of a string of events, exacerbated by the fact that the crash occurred during Asian trading hours, thereby increasing sterling’s vulnerability.
The investigation by the markets committee at the Bank for International Settlements (BIS) said: “The presence, outside the currency’s core time zone, of staff less experienced in trading sterling, with lower risk limits and risk appetite, and with less expertise in the suitability of particular algorithms for the prevailing market conditions, appears to
“Staff less experienced in trading sterling”
have further amplified the movement.”
However, it dashed theories that the sharp fall was caused by “market abuse“or “fat finger” errors – where a trader enters the wrong order – claiming there was “little, if any, hard data to substantiate them”.
Mark Carney, governor of the Bank of England, said there were no deep losses in the wake of the crash, but called for action to be taken to ensure market confidence.
It was initially thought that a newspaper story stating French president Francois Hollande would make Brexit negotiations tough for Britain – judged to be negative for the UK currency – was a main driver of the flash crash. But BIS said the report did not provide any new information and was more likely to have “exacerbated existing volatility”.