Fat fingers, black box trading, the mysterious trading ‘twilight zone’ and, inevitably, the French are all being blamed for Friday’s dramatic fall.
As already discussed, it would be a brave investor to bet against a further slump in the value of the pound.
But while macro-triggered currency swings are headache enough, factoring in the threat of tech glitches is doubly hard to swallow; especially for an industry putting its faith in the new wave of fintech and robo-advice.
Worryingly, Jim Wood-Smith, head of research at Hawksmoor Investment Management, draws parallels with the events of October 1987.
"Factoring in the threat of tech glitches is doubly hard to swallow; especially for an industry putting its faith in the new wave of fintech and robo-advice"
“The crash itself was minor selling, which caused technical levels to be breached,” he remembers.
“This then triggered more selling in expectation of further drops. These in turn triggered ‘portfolio insurance’ programmes: new bits of software that automatically sold stocks when a portfolio value dropped to a certain level.
“That was 29 years ago. Last week’s sterling mishap tells us that in three decades nothing has changed. Computers and markets are an exciting marriage.”
Had last week’s crash impacted our stock markets rather than just our currency, then I’m sure there would be even greater fuss.
As it stands, there are few Black Monday parallels to be drawn in equities with the FTSE 100’s position today at a spectacularly healthy 7,100 points.
Lest we forget, the bull market of the past seven years owes much to developments in black box trading, including through ETFs and smart beta funds.
For Richard Stammers, investment strategist at European Wealth, while the papers have been full of horror stories – the pound down some 18% against the euro and 15% against the dollar this year – the focus should be on the bigger picture at hand.
He says: “The truth is nobody really knows what caused the flash crash. European currency markets were closed. Was it thin volumes? A rogue trade? Does it really matter?
“The simple fact is that with Brexit – whether of the hard or soft variety – looming on the horizon, the pound is going to be under pressure.”
