It was shortly after 7 AM on October 7 in Hong Kong, before most traders had reached their desks, when the British pound suddenly tanked, losing 6% of its value in a matter of minutes. The move triggered an avalanche of trading during what is normally the foreign exchange market’s quietest period—the handoff from New York to Asia.
The cause of the flash crash is still being investigated, but market participants say algorithmic trading was to blame for at least accelerating the sell-off, if not initiating it. The machines have taken over much of the FX market from human traders at the banks, raising concerns about market stability during periods of stress.
In this case, overzealous Twitter-reading algorithms may have picked up on French president François Hollande’s remarks that Britain would “pay the price” for Brexit. The pound was already trading at a 31-year low, and technical algos kicked in once it fell below certain levels. The Bank for International Settlements is expected to confirm these suspicions in its initial report.
Meanwhile, the 16% drop in the pound since the Brexit vote in June will boost UK exports but will also worsen inflation. This will undermine real income and wages and weaken domestic demand.