Macroeconomics
In October fell the british currency about nine per cent in the space of 38 seconds.
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on the Night of Friday 7. October last year there was a tremendous difference in the exchange rate of the british pound. In a matter of seconds the crash course completely, before the later picked up again.
Such events are often referred to as the “flash crash”.
the Organization Bank for International Settlements, often referred to as the banks ‘ central bank, la on Friday, forward a report, after examining what can be the background for the exceptionally powerful movement.
Fell nine per cent in 38 seconds
In the report illustrated that the crash happened during a very short period of time
- at 01:07:03, Norwegian time on the night of 7. October was the british pound traded 1,26 dollars in the foreign exchange market.
- 38 seconds transmitters at 01:07:41, there was registered a midtkurs as low as 1,1491 dollars for a pound on the Reuters’ trading platform. Midtkursen is the average of the best sales and purchase orders at that time.
the Fall corresponds to a weakening of the pound sterling on the nine per cent during the short period. On other trading platforms, it was registered even lower midtpunktkurser.
Vulnerable to fluctuations
According to the BIS suggests the investigations that there is a single cause to the fall, but that a number of factors have led to the decline and helped to reinforce it. At the same time shows the surveys that the trades took place at a time of day where the currency was particularly vulnerable.
“Several factors have probably contributed to and reinforced this markedsforstyrrelsen”, writes BIS in the report:
- Especially great demand to sell sterling in connection with the hedging of opsjonsposisjoner seems to have played an important role, according to the organization
- the Execution of automatic stop-loss order, that is added in order to limit the losses if the rate reaches one in advance defined limit, and that a number of positions were closed in the course of the short time period, may have also influenced the development.
These factors, see according to the BIS, appear to have contributed to the trade in terminmarkedene stopped up. This contributed in its turn to remove the liquidity that normally are supplied to foreign exchange markets by the market participants that are depending on data from terminmarkedene.
No evidence of “fat finger”
In the hours after the crash, it was pointed out that the movement could be due to an article the Financial Times published during the current time period and that was interpreted as negative for the pound. BIS believes, however, that the article only contributed only marginally to the fall, as it did not contain new information.
In retrospect, it has also been suggested that a so-called “fat finger”errors, that is, a tastefeil in connection with the execution of an order, may have led to the fall. BIS has, however, not found clear evidence to confirm such a hypothesis.
the Organization does not have the basis to suspect that the fall is due to a deliberate attempt to drive the exchange rate lower during a period of time on a day with thin trading.
the Crash occurred at a time of day where the trade takes place in Asia and outside opening hours in the ‘ homeland, says BIS. Less experience of trading in the pound sterling, lower risikovilje and less knowledge about the special handelsalgoritmer, see according to the organization, appear to have reinforced the movement.
Panic
the BIS report is partly based on a survey that the british central bank the Bank of England did in the aftermath of the event. According to the Financial Times showed the british survey that the fall was reinforced by the fact that a valutatrader placed repeated orders on a variety of marketplaces. The reason should have been that the trader panicked.
IN the BIS report, it is pointed out also that some of the participants in the foreign exchange market may have had a significant impact on how the trade worked and the prices evolved since it was very little liquidity in the period.
“Data from british regulators, shows that some markedsaktørers share of the trade increased significantly as the other pulled out”, states the BIS report.
“the Potential to undermine trust and confidence”
the Pound taken out of the way quickly back in the night to 7. October of last year. During one minute after the crash was the british currency once again traded between 1,20 and 1,22 dollars.
This event does not represent any new phenomenon, but rather a new data point in what looks to be a series of such “flash crash”events after the financial crisis,” notes the BIS in the report.
But despite many similarities with previous events, there was this time a few smitteeffekter to other currencies or asset classes. And none of the systemically important financial institutions sustained significant losses, ” states the BIS.
“Flash-events have until now generally been short-lived and without immediate consequences for financial stability. The same seems to have been the case for the incident with the pound”, said the report.
“Such incidents, however, have the potential to undermine confidence in the financial markets and thus affect the real economy. Therefore, it is important for the authorities to gain a better understanding of modern markedsstrukturer and associated vulnerabilities”, concludes the BIS.
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