The British pound suffered a “flash crash” earlier this morning in which it plummeted six percent against the US dollar within a matter of minutes. All signs point to high frequency stock trading as the culprit—and possibly a single algorithm.
The British pound fell by more than six percent this morning, suddenly dropping to $1.18, a value that hasn’t been seen in 31 years. The currency quickly rebounded, finally settling in at about $1.24. The so-called “flash crash” was brief, but it’s still sending shockwaves throughout the financial world.
“I initially doubted what I saw on my screen,” said Kenji Yoshii, a foreign exchange strategist at Mizuho Securities, in the Wall Street Journal.
Normally, dramatic drops like this are triggered by major news events, such a declaration of war or a monumental political development. But experts say this incident was likely the result of trading algorithms that were reacting to recent comments made by French President Francois Hollande, who called for tougher Brexit negotiations.
“Apparently it was a rogue algorithm that triggered the sell-off after it picked up comments made by the French President, Francois Hollande, who said if Theresa May and [company] want hard Brexit, they will get hard Brexit,” noted Kathleen Brooks, research director at City Index.
She says that some modern algorithms trade on the back of news sites, and even on what’s trending on social media sites like Facebook and Twitter. “[A] deluge of negative Brexit headlines could have led to an algo taking that as a major sell signal for GBP,” said Brooks. “Once the pound started moving lower than more technical algos could have followed suit.”