Was it a “fat finger” trade? Or faulty algos? Or maybe even harsh Brexit-related comments from French President François Hollande?
Ever since the pound’s
flash crash on Oct. 7 last year, regulators have tried to figure out the reasons for the mysterious plunge that rattled investors that Friday morning. Now the Bank for International Settlements — known as the “central bank for central banks”— has concluded there wasn’t one single driver behind the crash, but a whole range of factors.
“The time of day played a significant role in making the sterling foreign exchange market more vulnerable to imbalances in order flow,” a BIS report out on Friday said.
“Significant demand to sell sterling to hedge options positions and the execution of stop-loss orders as the currency depreciated also had an impact. The presence of staff with less expertise in the suitability of particular algorithms for the market conditions appears to have amplified the movement,” it added.
In Oct. 7’s early hours, sterling sank around 9% against the dollar in thin Asian trade to as low as $1.1378 on some trading platforms. Other currency-providers showed a low of around $1.1841, but in any case it was a major slumped compared to the $1.2615 recorded the day before late in New York. Over a period of just eight seconds, sterling fell from $1.2600 to $1.2494, according to the BIS.
Analysts were left blindsided by the event and offered a host of reasons that could have triggered the move. One common explanation at the time was comments from French President Hollande the night before, when he urged the European Union to take a tough stance on the U.K. when Brexit negotiations kick off.
Others cited the so-called twilight zone between U.S. and Asian trading hours, when volumes are particularly thin. And some analysts speculated that the crash could have been triggered by a trader accidentally entering the wrong number.
“Fat finger’ errors and potential market abuse cannot be ruled out given the incomplete data set, but there are little, if any, hard data to substantiate them”
A Financial Times report in December blamed a Citi trader who panicked and then used a tool known as an “Aggregator” to fire off a large number of sell orders into a range of trading venues.
But according to the BIS report, it wasn’t just one of these factors, but a series of events that brought sterling to its knees.
‘Extreme dysfunction’ in the market
In the run-up to Oct. 7, sterling had already been under heavy selling pressure on concerns about the U.K.’s exit from the EU. Shortly after midnight London time, trading volumes picked up sharply. When the FT published the story on Hollande, the selloff accelerated.
In what the BIS calls the second phase of the flash crash, a few minutes of “extreme dysfunction” in the market caused sterling to fall further, before the currency rebounded. During this period, volumes tanked and it’s likely that “trading activity of individual participants” could have significantly amplified the move, the institution said in the report.
“This dynamic may have been further exacerbated by the presence, outside the currency’s core time zone, of staff at some institutions who were less experienced in trading sterling,” the BIS said, without naming any specific firms.
But a fat finger trade? That’s less likely, according to the bank.
“‘Fat finger’ errors and potential market abuse cannot be ruled out given the incomplete data set, but there are little, if any, hard data to substantiate them,” it said.