Sterling flash crash blamed on ‘black box trading’

While analysts speculated on possible causes, theories such as rogue computer trades, an a simple mistake or accidental “fat finger” transaction, as well as uncompromising comments made last night by French president, François Hollande, on Brexit negotiations, were put forward.

However, according to reports today, the explanations gaining the most traction appear to revolve around algorithmic trading, or so-called ‘black box trading’ that aims to eliminate human failings by programming a computer to carry out trades based on instructions tailored to a range of scenarios.

The incident happened at a time when there is very little pound trading going on - which means that any sell-off will have a bigger impact than during busy hours.

While the Bank of England said it was “looking into” the flash crash, an algorithm (know to traders as ‘algos’) that might have been set to sell a currency automatically when its average value over 50 days falls below the average value over 200 days might have been responsible.

Another theory is that an algorithm designed to function on the basis of what it gleans from various newsfeed headlines and social media posts could have sparked a mass sale.

Analysts at City Index said: “Apparently it was a rogue algorithm that triggered the sell-off after it picked up comments made by the French president, François Hollande, who said if Theresa May and company want ‘hard Brexit’, they will get hard Brexit.”

City Index said a sell-off triggered by Twitter-reading algorithms could have been exacerbated by a different group of “technical” algorithms that sell once a currency falls below a certain level thus producing a vicious cycle and self-fulfilling prophecy.