THE foreign exchange markets are about the most liquid trading arena in the world, certainly for the major currencies. So sterling’s 6% fall in two minutes this morning—from $1.26 to $1.18, with a similar-sized move against the euro—was a very unusual event. 

Traders’ minds went back to the Swiss franc’s sudden jump in early 2015, when the currency rose by 30% in an instant. But that was down to a change in policy; the abandonment of the Swiss National Bank’s cap on the franc’s strength. There was no such news to affect the pound.

The best explanation seems to lie in the world of algorithmic trading—the computer programmes that automatically generate transactions. Such programmes have been blamed for “flash crashes” in the equity markets, particularly the May 2010 event which saw the Dow plunge nearly 1000 points in minutes before recovering. The problem seems to be that programmes feed off each other. Each may have a trigger point which requires the programme to sell an asset (currency, bond or share) when it…Continue reading