Official report finds sterling’s sudden plunge to a 31-year low against the dollar in October was caused by string of factors

October’s flash crash in the pound – when the currency nosedived by 9% against the dollar in Asian trading hours – was caused by a combination of inexperienced traders, algorithmic trading and complex trading positions, according to an official report.

No single factor caused the dramatic moves which compounded the weakness of sterling after the Brexit vote, the international banking body, the Bank for International Settlements, said.

Other factors such as “fat finger” errors and potential market abuse cannot be ruled out, but there is little, if any, hard data to substantiate them, the report added.

What caused the pound's flash crash? Read more

The actions of individual participants, who are not identified, may have helped perpetuate the fall, as did the derivatives trading positions placed in the market. Some traders halted activity for as long as 30 minutes, including the black box algorithmic trading which does not rely on individuals to place orders.

Some of the trades made as sterling plunged to as low as $1.1491 – down from $1.26000 – just after midnight on 7 October were later cancelled, the BIS report said.

“Whatever the cause of the initial selling in sterling, the market was likely to be vulnerable at that time of day to sharp moves and an associated withdrawal of liquidity,” the report said.

Bank of England governor Mark Carney, who asked the BIS to investigate, said it was vital that lessons were learned from the incident, which drove the pound to the lowest level since March 1985.

“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,” said Carney.

The pound's fall during October's flash crash The pound’s fall during October’s flash crash

The report breaks down the event into three stages. First, just after midnight, for a period of only eight seconds (00:07:03 to 00:07:11) sterling fell from $1.2600 to 1.2494. About £252m of pound-dollar trades and €52m (£42m) of euro-pound trades took place on the Reuters platform.



Second, at 00:07:15, the Chicago Merchantile Exchange triggered its velocity logic mechanism, which pauses trading for 10 seconds on the futures exchange. Around this time, it become more difficult to find a price for the pound on the currency markets as there were not enough “bid” offers, which would have cushioned its falls. This was an “unusual phenomenon”, the report said.

By 00:07:15 the pound was at $1.24 and “gapping between trades” to slide to $1.1491 at 00:07:41, a 9% fall. Those were the prices quoted by Reuters and the report noted that the currency traded lower on other trading platforms.

In the third phase, the pound began to recover and was 2.2% down against the dollar by 00:20:00.

The event took place amid thin trading and during a public holiday in China. which also meant big players may not have been in the market. A survey of 12 of the most active dealers showed that the lack of buy orders may have been caused by trading positions already in place.

The time of day meant that traders were less experienced in sterling markets. “Such individuals were likely to have had lower risk limits and risk appetite, and may have had less expertise in the suitability of particular algorithms for the prevailing market conditions,” the report said.



“Evidence in the UK also suggests that some traders’ participation during the event may have been constrained as a result of concerns around potential market and conduct risks associated with trading in illiquid markets away from previous prevailing price levels. Both factors could have exaggerated the speed and dysfunctional nature of the price movement.”



As the slide coincided with a Financial Times story saying French president François Hollande was calling for a hard Brexit, this had been cited as a potential cause. However, the report said this “is only likely to have added marginal weight to the move as it did not contain new information”.