Pound Flash Crash Has Traders Blaming Algos for Selling Frenzy

The pound plunged as much as 6.1 percent against the dollar, the biggest decline since the day the U.K.’s Brexit referendum result was announced, in a move that traders said was exacerbated by computer-initiated sell orders.

Sterling sank as low as $1.1841 in early Asian trading, according to data compiled by Bloomberg, the lowest since March 1985. The pound pared the drop to trade 1.5 percent weaker at $1.2428 at 11:21 a.m. in Tokyo. Some traders saw the possibility of human error, or a so-called “fat finger,” with algorithms adding to selling pressure at a time of day where liquidity is typically low. Others pointed to a Financial Times article citing French President Francois Hollande as saying the U.K. must suffer the consequences of leaving the European Union.

Derek Mumford, a director at Rochford Capital Pty in Sydney, said he and his colleagues were searching for a reason as the pound tumbled, scanning news agency reports and the Internet.

“The speed of the move looks like a kind of a flash crash, some sort of failure,” Mumford said, adding that sterling is set to drop to $1.15 in the coming weeks if it doesn’t recover above $1.28. “I’m sort of struggling to justify it. I don’t think there’s any shock that the EU will be going for a hard Brexit.”

How Low

There was even confusion over how low the pound actually fell. Bloomberg’s composite price — which takes the median contribution from a range of dealers — showed the currency dropping to $1.1841. But some banks quoted sterling at even weaker levels, with at least one electronic trading platform recording a transaction as low as $1.1378, said traders familiar with the transactions, who asked not to be identified because they aren’t authorized to speak publicly. The discrepancy left some dealers in Asia waiting for client mediation teams to decide whether some stop-loss orders were filled, the traders said.

The FT reported that Hollande, speaking in Paris at a dinner attended by EU officials, urged the bloc to lead tough negotiations with Britain to avoid contagion and protect the fundamental principles of the single market.

“Such comments on their own would not be enough to cause a plunge on this scale, but once a move gets going in thin liquidity it can snowball quickly,"  said Gareth Berry, a foreign-exchange and rates strategist in Singapore at Macquarie Bank Ltd. While the pound “may recover to the $1.25 area today, all technical support has now been obliterated, so sterling is doomed from here over the months ahead.”

Other markets showed muted reaction to the plunge. S&P 500 Index futures slipped as much as 0.4 percent before paring the drop to 0.2 percent. Contracts on the U.K.’s benchmark equity gauge, where exporters have been rallying as the weaker pound buoys the outlook for earnings, added 0.7 percent.

Hard Brexit

Leaving the EU has been the main topic at the ruling Conservative Party’s annual conference this week, where U.K. Prime Minister Theresa May seemingly moved closer toward a so-called hard Brexit that would restrict access to the EU’s single market so that the government can control immigration. Sterling has tumbled since May’s speech on Sunday, accelerating losses as she was said to take the view that financial services would get no special favors in EU exit talks.

Worst Performer

With March now set as the deadline for triggering divorce proceedings, tensions are playing out in the currency market. The pound has dropped 16 percent since the referendum to leave the world’s biggest single market, and is 2016’s worst performer among 31 major currencies tracked by Bloomberg. Companies including Goldman Sachs Group Inc. and AllianceBernstein Holding LP have issued predictions for more pain ahead.

“It looks like it was a algorithm-driven flash crash triggered by a Financial Times article based on French President Hollande’s speech on Brexit,” said Angus Nicholson, a markets analyst in Melbourne at IG Ltd. “Given low volumes in the Asian session, it would have forced other algorithms to join in and magnify the fall.”