Market watchers say a sell-off triggered by worries about the UK’s exit from the European Union was accelerated by computerised trades. Here are five things to know about the pound’s moves.
It’s only No. 4
The British pound is the world’s fourth-most traded currency, after the US dollar, euro and yen, but there’s a big gap between it and the leaders. Sterling’s average daily turnover is less than one-fifth of the US dollar’s and about two-fifths of the euro’s, according to the Bank for International Settlements. Thinner trading volume can mean exaggerated price swings.
The pound plunged just after 7 am Hong Kong time (7 pm in New York), in what Chris Weston, a Melbourne-based strategist at brokerage IG, called the “twilight zone” of trading. Around that time, big US trading desks are typically winding down but Asian trading desks may not yet be fully staffed, further crimping trading volumes.
Blame the computers
As the pound fell sharply, traders said it broke through price levels that likely triggered automatic sell orders. Such orders are designed to kick in to curb losses when prices fall. The fall may also have triggered selling by computers programmed to sell during particular market conditions, like when volatility spikes.
Market participants said the magnitude of the pound’s drop suggested investors caught off guard. Leveraged funds, a group that includes some hedge funds, have broadly added to negative bets on sterling since July, holding 99,247 short contracts on the pound as of September 27, according to the latest data from the US Commodity Futures Trading Commission. But that is less than this year’s peak of 113,434 short sterling contracts in the week ended March 8.
What’s the price?
Banks have typically dominated currency trading, but they are slowly losing share to entities like hedge funds, high-frequency traders and electronic market makers. That could be a problem, since banks tend to quote prices even in times of market stress, while other players may not, letting prices slide faster, according to John Ball, Asia representative for the global foreign-exchange division of the Global Financial Markets Association. The top five global banks accounted for 44.7% of foreign-exchange trading volume in 2016, versus 61.5% in 2009, according to a Euromoney survey.
This article was published by The Wall Street Journal