Out-of-depth traders among reasons for the seriousness of last year's sterling flash crash

Hayley Kirton
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Inexperienced bankers (not pictured) have been named as one of the reasons for last year's flash crash (Source: Getty)

The bank for central banks has today pointed the finger at inexperienced traders as one of the causes of last October's sterling flash crash.

On 7 October last year, sterling plummeted around nine per cent against the US dollar in the early hours of trading in Asia, although it bounced part way back again quickly after, leaving many scratching their head as to what happened.

Now, the Bank for International Settlements' markets committee has revealed a series of multiple unfortunate events led to the sudden slide, and it found no definitive evidence pointing to a single cause, such as a fat finger trade or, as had previously been suggested, an FT article which could have been read as being negative on sterling and was published at a similar time to the crash.

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It also noted there had been no material loss as a result of sterling's rollercoaster ride.

The report highlighted the time of day played a significant role in the crash, as it meant desks were manned by staff who were less experienced with how to handle sudden movements in sterling.

People suddenly rushing to sell sterling and the triggering of stop loss orders, which aim to cap the amount of losses a person will rack up in the event of very sudden market movements, also contributed to the severity of the crash.

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Although no material losses were felt, the Bank for International Settlements noted last October's flash crash was not an isolated incident and similar events had been popping up in other markets, some of which would have previously been large and liquid enough to prevent such sudden incidences.

"Since such events have the potential to undermine confidence in financial markets and impact the real economy, it is important for policymakers to continue to develop a deeper understanding of modern market structure and its associated vulnerabilities," said Guy Debelle, chairman of the markets committee.

Mark Carney, governor of the Bank of England, added:

It is vital...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.

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