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Flash crash sees the pound gyrate in Asian trading Flash crash sees the pound gyrate in Asian trading
(35 minutes later)
The pound has dived on Asian markets with automated trading being blamed for the volatility.The pound has dived on Asian markets with automated trading being blamed for the volatility.
At one stage it fell as much as 6% to $1.1841 - the biggest move since the Brexit vote - before recovering to $1.24, still down 1.5%. At one stage it fell as much as 6% to $1.1841 - the biggest move since the Brexit vote - before recovering. It was recently trading 3% lower at $1.2241.
It is not clear what triggered the sudden sell-off. Analysts say it could have been automated trading systems reacting to a news report.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 Bank of England said it was "looking into" the flash crash.The Bank of England said it was "looking into" the flash crash.
The sharp drop came after the Financial Times published a story online about French President Francois Hollande demanding "tough Brexit negotiations".The sharp drop came after the Financial Times 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."It's difficult to know exactly what triggered it," Angus Nicholson, market analyst with IG in Melbourne, told the BBC.
The pound has been volatile since the UK voted to leave the European Union.The pound has been volatile since the UK voted to leave the European Union.
Analysts speculate that a computer may have been set to scan the news for negative Brexit stories, with the order to sell if it found any.Analysts speculate that a computer may have been set to scan the news for negative Brexit stories, with the order to sell if it found any.
The trigger could have also been a simple mistake, or what's know as a fat finger trade, when a trader enters a wrong number. The trigger could have also been a simple mistake, or what's know as a fat finger trade, when a trader enters a wrong number. Analysts at JP Morgan who have analysed the flash crash think that was unlikely to be the trigger.
Live: Pound gyrates on the currency marketsLive: Pound gyrates on the currency markets
'Feedback loop' 'Selling pressure'
The situation could have been exacerbated by trading algorithms - software which is designed to trade automatically and can react much faster than human traders.
"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.
"That may have brought in other algorithms which compounded the selling creating a feedback loop that resulted in a flash crash."
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. The situation is likely to have been exacerbated by trading algorithms (sometimes know as algos) - software which is designed to trade automatically and can react much faster than human traders.
"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 the pound," says Kathleen Brooks, research director at City Index.
"Once the pound started moving lower then more technical algos could have followed suit, compounding the short, sharp, selling pressure."
Ms Brooks thinks another flash crash could be on the cards for the pound.
"This highlights the drawback of machines making trading decisions, however, it is the reality, and it is only getting more popular. Thus, another flash crash is possible," she said.
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.
Sterling has been "on a precipice" since then, according to Sean Callow, senior currency strategist at Australian bank, Westpac.Sterling has been "on a precipice" since then, according to Sean Callow, senior currency strategist at Australian bank, Westpac.
"I think we've underestimated how many people had money positions for a very wishy-washy Brexit, or even none," he said."I think we've underestimated how many people had money positions for a very wishy-washy Brexit, or even none," he said.
'Lose-lose situation''Lose-lose situation'
Analysts at HSBC are forecasting that the pound could fall to $1.10 and could be worth just one euro by the end of next year.Analysts at HSBC are forecasting that the pound could fall to $1.10 and could be worth just one euro by the end of next year.
"The argument which is still presented to us - that the UK and EU will resolve their difference and come to an amicable deal - appears a little surreal," said David Bloom, head of foreign exchange research at HSCB. "The argument which is still presented to us - that the UK and EU will resolve their difference and come to an amicable deal - appears a little surreal," said David Bloom, head of foreign exchange research at HSBC.
"It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation. A lose-lose situation is the inevitable outcome.""It is becoming clear that many European countries will come to the negotiation table looking for political damage limitation rather than economic damage limitation. A lose-lose situation is the inevitable outcome."
Even though the pound recovered ground immediately after the flash crash, Friday's tumble might still have a broader impact.Even though the pound recovered ground immediately after the flash crash, Friday's tumble might still have a broader impact.
Mark Priest, a trader at ETX Capital said: "It becomes a confidence thing - is there something lurking out there we don't know about?"Mark Priest, a trader at ETX Capital said: "It becomes a confidence thing - is there something lurking out there we don't know about?"
Nicholas Teo of KGI Securities in Singapore said: "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 sterling, will almost certainly lead to unintended consequences for many."Nicholas Teo of KGI Securities in Singapore said: "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 sterling, will almost certainly lead to unintended consequences for many."