Sterling's 'flash crash' on 7 October 2016 was caused by “a range of factors”, according to a report by the Markets Committee on the event in which sterling depreciated by about 9 per cent against the dollar within a matter of seconds before regaining some of its value.
The time of day was an important contributing factor, according to the report and analysis by the Bank of England. The event happened early in the morning during Asian trading, which played a significant role in making the sterling foreign exchange market more vulnerable to imbalances in order flow. The report stated: “Significant demand to sell sterling to hedge options positions and the execution of stop-loss orders as the currency depreciated also had an impact. The presence of staff with less expertise in the suitability of particular algorithms for the market conditions appears to have amplified the movement.”
Bank of England Governor Mark Carney said: “The report finds that there were no material losses incurred by systemic financial institutions, large volumes were transacted around the event window despite the illiquid time of day, and spillovers to other markets were very limited. 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. 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.”
The report was prepared by the Bank of England and the Bank for International Settlements, with market intelligence gathered by the Markets Committee, which is a forum of central bank officials. The for the full press release click here.
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