Daily Management Review

Automated trading systems could cause a sharp drop of the British currency


10/07/2016


This morning, the British pound has experienced a sharp drop of more than 6%, which immediately caused panic on the stock exchanges. However then, the pound almost completely restored to its previous value within minutes. Experts suspect that this occurrence may be caused by programs for automated exchange trading, which in 2010 collapsed the Dow Jones index.



Katrina.Tuliao
Katrina.Tuliao
The fall of the British pound was observed in Asian trading. Within a few minutes, it rushed down at the level of $ 1.13, while the rate was still $ 1.24 a day earlier. Sharp depreciation of the pound led to panic selling among traders, yet the currency recovered to previous values after just a few minutes. So far, analysts have only begun to understand what really happened. Some of them already expressed suspicions against automated programs for exchange trading, which caused collapse of the US stock market a few years ago.

May 6, 2010 the index Dow Jones Industrial Average at the NYSE fell by more than 9% in just a few minutes. This reduced capitalization of the market at half a trillion dollars. After 20 minutes, the index grew back to its previous level. This event, called the Flash Crash, was followed by hearings in the US Congress, the incident was further investigated by the Securities and Exchange Commission and the Commodity Futures Trading Commission. It turned out that a failure of algorithmic traders apps that day triggered avalanche growth in sales of electronic futures contracts. As a result of investigation, US authorities have introduced new rules for more rapid cessation of trading in the event of a sudden groundless drop in prices by a certain amount, depending on the trading volume and the initial price per share.  

Similar symptoms have forced analysts to newly suspect automated traders program. Some point out that the sharp depreciation could have occurred after publication of the FT article, in which the French President Francois Hollande required "tough negotiations with Britain on Brexit". "Perhaps this article caused the violent reaction of some algorithm programmed in the news stream or certain words in it. After that, other algorithms have noticed strong reaction of the program, which subsequently caused the avalanche response", - said Angus Nicholson, an analyst at the Australian office of the British investment company IG Group, which specializes in computer trades, in an interview to BBC. 

However, even if the algorithmic trade programs are to be blamed for today's collapse, it still wouldn’t have occurred without generally negative news on Brexit and its possible consequences for the British economy and, as a consequence, currency. Last week, the pound has reached 31-year low, and the IMF has lowered its forecast for growth in the UK's GDP. "The stream of negative news around Brexit could well lead to the fact that the algorithm took this as a signal to sale", - said in an interview with ABC television Kathleen Brooks, director of Forex.com Company and City Index.

source: bbc.co.uk






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