Latest Pound Crash Illustrates Need for Patience

Everyone wants to point the finger at something, or someone, when it comes to flash crashes, but sometimes it's not that simple.

Ten pound note in flames

Dan says the pound's recent tumble is an example of people jumping to conclusions.

I recently watched Amanda Knox, the new Netflix documentary that examines the American of the same name who was charged, acquitted, charged and then again acquitted of murdering her roommate while studying abroad in Italy.

Whether you believe Knox is guilty or innocent, I think we all can agree that the media, and specifically journalist Nick Pisa—who many see as the actual antagonist of the film—did little to help the investigation into the murder of Meredith Kercher. If anything, the international media coverage of the murder pushed the Italian police to come up with a suspect faster than they might normally have been comfortable with.

This is certainly not an outlier when it comes to the media's involvement in criminal cases. Fantastic Lies, the ESPN documentary examining the 2006 Duke lacrosse team that was accused of raping a stripper, is another great example of the media looking to push a narrative they believe to be true, or, if you're a cynic, will get clicks.

Pound Problems

I bring this up because it reminds me of the crash of the British pound on Thursday/Friday. Since the crash, everyone has speculated about what could have caused it, pointing to, at times, a "fat finger," an algo gone mad or comments made by French President François Hollande about Brexit.

The truth appears to point to more of a perfect storm. Trading desks were light around the world due to the timing of the events, meaning volumes were thin. This was, essentially, a powder keg waiting for its fuse to be lit.

One source I spoke to on the day of the event summed it up perfectly. "Fat fingers are certainly possible, but that strikes me as improbable. Foreign exhange (FX) markets—especially majors like GBP—tend to have enough liquidity, but with so many people and algos sitting anxiously on the sidelines, any sort of event (Hollande's comments, etc.) can certainly trigger a cascading effect," the source said. "It feels like there's a level of tension built up in the FX markets and any sudden movement or news can trigger a chain reaction, driven by human psychology and/or algos."

Kevin McPartland, who leads the market structure and technology research at Greenwich Associations, had a great take on the whole event. Here is the lede to a recent blog post he put up regarding the event.

I wish we could get away from calling every bout of extreme price volatility a flash crash. Markets crash and rebound—they always have. Today it can happen in a few minutes, back in the 80s it would take a few days. But the causes are often the same.

The markets have obviously changed significantly over the past decade. The dominoes aren't being pushed any differently, they are just falling much faster.

Change of Course

I'm not suggesting the media, and the industry as a whole, shouldn't look for causes of these types of events. If there are some predatory tactics at work, like a firm specifically making a move to tank the pound during a time it knew the currency was vulnerable, then that obviously needs to be investigated. There should also be verification that  algos are operating properly.

However, people yelling and finger pointing gets us nowhere. The markets have sped up. There is a zero chance of scaling back all electronic trading and eliminating algorithms. Instead, firms and regulators need to work together to make sure the markets are as fair and transparent as possible.

How that can be done should be left to people far smarter than me. But looking for a culprit, as opposed to discovering a solution to the problem, isn't necessarily the best way forward.

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