BIS: Sterling Flash Crash Has No Single Driver

There is little if any data to support suggestions that traders may have deliberately spurred October’s flash crash in sterling, a Bank for International Settlements report said on Friday, pointing instead to a range of structural factors.

The report from the BIS Markets Committee steered clear of discussing the conduct of individual banks or traders in the 9 percent fall and recovery of the pound over a few minutes around the start of the Asian trading day on Oct. 7.

The Financial Times reported last month that regulators had been looking at the activity of a Japan-based trader at U.S. bank Citi, the world’s single biggest currency trading institution, during the currency’s fall.

Citi has said its trading operations functioned appropriately in a thin and illiquid market.

“Based on the available evidence, this event (the flash crash) appears to have been the product of a confluence of factors,” the committee, made up of representatives of the world’s major central banks, said in the report, stressing that it had not considered “specific issues around market conduct” during the event.

It pointed chiefly to the generally low liquidity of the market at the time of day when the crash took place, along with the execution of stop-loss and options hedging orders triggered by the sharp changes in the exchange rate.

“Other factors such as ‘fat finger’ errors and potential market abuse cannot be ruled out given the incomplete data set, but there are little, if any, hard data to substantiate them,” the report said.

Group committee chairman, Reserve Bank of Australia Deputy Governor Guy Debelle, said the report’s conclusions had been factored in to ongoing work on a global code of conduct for the giant $5 trillion a day foreign exchange market.

“There are direct lessons … which have been taken on board,” Debelle said.

“These include … participants’ obligation to consider the disruptive consequences of their trading activity, governance around algorithmic execution of trades, and how market participants might best determine the low (or high) point of pricing in a flash event.”

Lessons

The sudden fall in the pound was the latest in a series of such events on major financial market in the past three years, generally assumed to be linked to a drop in day-to-day risk taken by banks and a move towards more computer-driven trading.

Sources familiar with discussions at BIS meetings told Reuters last month that there was growing concern among regulators about the need to address such crashes but that central banks would be reluctant to go as far as outright intervention.

The report also found that there were no material losses incurred by important financial institutions and that spillovers to other markets had been very limited, suggesting banks and other players were getting better at dealing with such crashes.

“It is vital, however, that we learn the lessons of this flash event and similar episodes in other financial markets, as orderly market functioning underpins market confidence,” Bank of England Governor Mark Carney said.

“It is also important that firms have adequate governance, systems and controls and give due consideration to the potential impact of their activity on market functioning.”

Reuters

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