A Financial Times report this morning is stating that a trader from Citi might have been implicated in the British pound’s October ‘flash crash’. Sterling’s value collapsed against the U.S. dollar from 1.26 to circa 1.14 in about 40 seconds.
The fall is said to have been affected by the Asian trading desk of Citi in Tokyo. According to the report, the investigation into the matter has mentioned the Japanese trading operations of Citigroup for sending repeated sell orders to the market.
The desk is not believed to have started the slide, but is said to have “played a key role”.
“human error” and/or a “poorly calibrated Execution algorithm”
FT’s report highlights that sources with knowledge of the matter said that a particular trader placed multiple sell orders on the GBP/USD market. Throughout a very intensive time on the market, the trader was described as “panicked” by one of the London-based newspaper’s sources.
An official statement by Citi outlines that the bank’s trading operations functioned well during the thin and illiquid market conditions as the GBP flash crash event unfolded.
"Sterling fell sharply following a news event just after midnight UK time, when the GBP spot foreign Exchange market was extremely illiquid. Citi managed the situation appropriately and our systems and controls functioned throughout the period,” the bank elaborated.
According to the FT’s report, the first stage of the crash was not concerning to the regulators, but the second round is said to have been caused by “rapid-fire sell orders placed in Tokyo by a Citi trader”. The trader is said to have been operating via an aggregator to send substantial quantity of orders to various market places.
After the event other traders are saying to have witnessed the extraordinary move that was exacerbated by the steady stream of sell instructions from Citi’s Tokyo trading desk.
The FT’s report elaborates on the order flow: “Orders started tripping over each other in a pattern known as “looping” that is normally constrained by safety nets embedded in bank trading tools.”
The Bank of England on its part has outlined “human error” and/or a “poorly calibrated execution algorithm”. The BoE has not elaborated on which trading desks have been under examination nor which banks have played a role in the flash crash.
