Computerised trade blamed for pound’s plummet

Sterling’s sharp drop-off was accelerated by computerised trades, market watchers said.

The wave of selling Friday follows a rough patch for the currency.

The British pound dropped sharply against the US dollar early in the local session, after a sell-off triggered by worries about the UK’s exit from the European Union, was accelerated by computerised trades, market watchers said.

The pound fell as much as 6.3 per cent in mid-morning (AEDT) trade on Friday, to $US1.1819 from $US1.2614 before recovering, according to Thomson Reuters data. More recently, it was down 1.4 per cent at $US1.2437.

“I initially doubted what I saw on my screen,” said Kenji Yoshii, a foreign exchange strategist at Mizuho Securities.

Traders and strategists said the initial catalyst for the pound’s drop came from remarks by French President François Hollande in Paris, who called for tough exit negotiations in comments cited by Sky News. His comments came early in the Asian session, where light trading volumes likely exacerbated the move, they added. As the pound’s descent worsened, it broke through technical levels that likely triggered further selling from trading strategies based on algorithms, traders said.

“There was a complete lack of two way interest in buying the pound on the way down,” said Jeffrey Halley, a senior market strategist at Oanda.

The drop occurred in the “twilight zone” of trading,” said Chris Weston, chief market strategist at IG, a broker. “This is the sort of time when the big US traders are going home and Asian traders are getting back to the desk,” he added.

The dollar-pound pair is the fourth most heavily-traded in global currency markets, according to the Bank for International Settlements.

Volatility in such major pairs tends to be exacerbated by automatic buy or sell orders which are triggered when an exchange rate crosses a certain threshold — often a round number such as 1.20 for the pound against the US dollar. Certain strategies related to currency options can have the same effect, triggering buy or sell orders.

Moreover, an array of sophisticated computerised trades can kick in and spark automatic trading under some market conditions, such as if volatility spikes or a currency appears oversold. These can intensify the momentum driving market movements.

The most likely cause of the pound’s sudden drop on Friday was a so-called ‘fat finger’ trade — that is, an error by a trader — or a rogue algorithm, said Bart Wakabayashi, managing director and head of Hong Kong foreign exchange sales at State Street Global Markets.

“When you have that big a move you’re triggering a lot of things on the way down, like stop losses and options barriers, which exacerbate the whole move,” said Mr Wakabayashi, who added he expected the pound would head back up toward its starting level on Friday in the near-term.

The wave of selling Friday follows a rough patch for the currency. Earlier this week, Prime Minister Theresa May set a date to begin the UK’s divorce process from the European Union and suggested controlling immigration was more important than maintaining full access to the UK’s largest trading partner.

Wall Street Journal