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Flash crash 'triggered by algorithm' drags pound lower Flash crash sees the pound gyrate in Asian trading
(about 1 hour later)
The pound has plunged in Asian trade, hitting a new 31-year low against the US dollar as traders speculate about a possible trigger. The pound has dived on Asian markets with automated trading being blamed for the volatility.
It fell more than 6% at one point to $1.1841 before recovering to $1.23, still 1.5% down from late US levels. At one stage it fell as much as 6% to $1.1841 - the biggest move since the Brexit vote - before recovering to $1.23, still down 1.5%.
Analysts say an algorithm reacting to a news report was the possible trigger for the sudden tumble. It is not clear what triggered the sudden sell-off. Analysts say it could have been automated trading systems reacting to a news report.
The pound has seen renewed pressure since the UK government said Brexit talks would start next March. The pound has been volatile since the UK voted to leave the European Union.
"It's difficult to know exactly what triggered it," Angus Nicholson, market analyst with IG in Melbourne, told the BBC.
The sharp drop came after the Financial Times newspaper published a story online about French President Francois Hollande demanding "tough Brexit negotiations".The sharp drop came after the Financial Times newspaper published a story online about French President Francois Hollande demanding "tough Brexit negotiations".
"It's difficult to know exactly what triggered it," Angus Nicholson, market analyst with IG in Melbourne, told the BBC.
Analysts think the situation could have been exacerbated by trading algorithms - software which is designed to trade automatically and can react much faster than human traders.
Chain reactionChain reaction
"Possibly a keyword or newsflow-focused algorithm started the selling in the pound based on that article, and other algorithms may have seen the volume and momentum coming into the pound at what is normally a relatively low volume time," Mr Nicholson said."Possibly a keyword or newsflow-focused algorithm started the selling in the pound based on that article, and other algorithms may have seen the volume and momentum coming into the pound at what is normally a relatively low volume time," Mr Nicholson said.
This could mean a computer had been set to scan the news for negative Brexit stories, with the order to sell if it found any. A computer may have been set to scan the news for negative Brexit stories, with the order to sell if it found any.
"That may have brought in other algorithms which compounded the selling creating a feedback loop that resulted in a flash crash," Mr Nicholson explained."That may have brought in other algorithms which compounded the selling creating a feedback loop that resulted in a flash crash," Mr Nicholson explained.
The incident happened at a time when there is very little pound trading going on - which means that any sell-off will have a bigger impact than during busy hours.The incident happened at a time when there is very little pound trading going on - which means that any sell-off will have a bigger impact than during busy hours.
"It's a very volatile currency at the moment," Mr Nicholson said."It's a very volatile currency at the moment," Mr Nicholson said.
And even though the pound recovered ground immediately after the flash crash, the Friday tumble might still have an impact.
"Whatever the case may be, the damage as a result of this flash move may not be insignificant," Nicholas Teo of KGI Securities in Singapore, said in a note.
"In this deeply interconnected and highly automated world of trading, a move as sharp as what we saw this morning on a product as widely traded as the Sterling will almost certainly lead to unintended consequences for many," he explained.
Unlike after the Brexit vote in June, markets were not prepared for any sudden moves this Friday.
"What could follow next, is a period of reconciliation and accountability for many brokers and their clients' accounts," Mr Teo wrote.
Brexit fallout
Traders remain nervous about the fallout from the UK's talks with the EU over leaving the bloc.Traders remain nervous about the fallout from the UK's talks with the EU over leaving the bloc.
Last Sunday, the Prime Minister Theresa May said she would trigger Article 50, the clause needed to start the exit process, by the end of March 2017.Last Sunday, the Prime Minister Theresa May said she would trigger Article 50, the clause needed to start the exit process, by the end of March 2017.
That means the UK is likely to leave the EU by mid-2019. Sterling has been "on a precipice" since then, according to Sean Callow, senior currency strategist at Australian bank, Westpac.
It was the first time that a timetable had been announced. "I think we've underestimated how many people had money positions for a very wishy-washy Brexit, or even none," he said.
Interconnected world
Even though the pound recovered ground immediately after the flash crash, Friday's tumble might still have a broader impact.
"In this deeply interconnected and highly automated world of trading, a move as sharp as what we saw this morning on a product as widely traded as the Sterling will almost certainly lead to unintended consequences for many," said Nicholas Teo of KGI Securities in Singapore.
Unlike after the Brexit vote in June, markets were not prepared for any sudden moves this Friday.
"What could follow next, is a period of reconciliation and accountability for many brokers and their clients' accounts," Mr Teo wrote.