Computers could be to blame for the pound's 'flash crash': Algorithmic trading may cause more mayhem
- The pound fell more than 6 per cent against the US dollar overnight
- Experts blame automated systems reacting to comments reported in news
- Francois Hollande said the EU must take a tough stance negotiating Brexit
- As traders increasingly rely on algorithms, it is likely this will happen again
The Bank of England is looking into the 'flash crash' which sent the pound plunging more than 6 per cent against the US dollar overnight, while experts think computers are to blame.
The value of sterling dived during the Asian trading session to $1.18, hitting fresh 31-year lows before recovering to $1.238.
Experts are blaming algorithmic trading, systems of computers designed to follow a set of instructions for placing a trade.
The Bank of England is 'looking into' the 'flash crash' (graph pictured) which sent the pound plunging more than 6 per cent against the US dollar overnight, but experts think computers are to blame
The Bank said it is 'looking into the cause of the sharp fall', but experts have pointed the finger towards algorithmic trading.
With old school trading floors ancient history these days, investors often depend on computers to pick winners.
Automated trading systems can be set up to keep an eye on news headlines and react to potentially market-moving information.
Facts are collected, analysed and a computer-generated decision is made based on an investor's pre-set wishes.
'The value of sterling plummeted overnight as algorithmic trading programmes apparently triggered a crash,' said XTB analyst David Cheetham.
Algorithm-based trading tends to save on labour costs and takes human emotion out of the investing equation.
They can also analyse vast amounts of information far quicker than humans.
But algorithms are not perfect and they do not always get it right.
Sometimes they over- or under-react to events.
Market-watchers pointed to comments by French President Francois Hollande yesterday, who insisted the European Union must take a tough stance in negotiating Brexit.
'Apparently it was a rogue algorithm that triggered the sell-off after it picked up comments made by the French President, Francois Hollande, who said if Theresa May and co want hard Brexit, they will get hard Brexit,' said Kathleen Brooks, research director at spreadbetter City Index.
'These days some algos trade on the back of news sites, and even what is trending on social media sites such as Twitter, so a deluge of negative Brexit headlines could have led to an algo taking that as a major sell signal for GBP.
'Once the pound started moving lower, then more technical algos could have followed suit, compounding the short, sharp selling pressure.'
Sterling was also sitting at a five-year low against the euro, down 1.5 per cent at 1.113 euro.
The Financial Times - among the first to report Hollande's comments - said the computers might have been reading its website.
Japanese and British flags placed in front of a monitor showing the Japanese yen rate against the British pound at a brokerage in Tokyo today. The pound suffered a 'flash crash' in Asia on a computer-generated sell-off
Market analyst David Cheetham at XTB agreed.
'It seems... plausible that news-scanning algorithmic trading systems began a move which gathered momentum as stop loss orders were triggered on the way down,' he said.
He added a combination of trades placed by algorithms and stop-loss orders can 'exacerbate the move, which is commonly seen to retrace by a significant proportion of the decline within a matter of minutes'.
Stop-loss orders are safety mechanisms put into place by traders.
They tell their computers to automatically sell when the value of their commodity hits a certain point, in order to prevent them from losing any more money.
At one point the pound plunged to $1.18 dollas. Sterling was also sitting at a five-year low against the euro
If lots of players in the market place stop-loss orders at the same value, the increased selling can add to the losses.
Traders have been increasingly alarmed since the Conservative Party conference began last weekend, with the Prime Minister giving her clearest indication yet that Britain is hurtling towards a so-called 'hard Brexit'.
It would involve pulling Britain out of the European single market so the Government can tighten its grip on immigration.
As algorithmic trading becomes more popular and cost efficient, and Brexit creates more uncertainty, another crash like this one could be on its way.
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