Officials looking into the factors behind the dramatic fall in sterling on Oct. 7 will issue an initial report to a group of global central banks in early November, sources with knowledge of the investigation said.
It is two weeks since the pound dived and rebounded by about 10 percent in a few minutes at the start of Asian trading, an unprecedented swing for a major currency at an hour when the $5-trillion-a-day market is at its lowest ebb.
The moves triggered another round of the hefty losses the pound has suffered since June’s Brexit vote and some sales of UK assets by investors worried over the stability of the currency and its impact on inflation.
Bank of England Governor Mark Carney asked the Markets Committee based at the Swiss-based Bank of International Settlements to investigate.
That work has been delegated to some of the individual central banks who are members of the committee, who will give an initial report and then a final one, probably sometime in the first half of next year.
“(The committee) is still in the information-gathering phase but they have a pretty good idea of what happened. The (currency trading) platforms have generally been very helpful with providing data,” one source familiar with the first stage of the investigation said on Thursday.
“It will probably be another 2 or 3 weeks before they are ready to draw conclusions but I am sure they will report to the Markets Committee when it meets in early November.”
Market participants generally agree the sell-off was at least worsened by the algorithmic machine trading that makes up much of the global currency market, while some speculate the initial move may have come from electronic news gathering software or other parameters used in trading programmes.
BIS declined to comment on the progress of the investigation and does not publish dates of its committee meetings.
But a second source with knowledge of its workings confirmed the markets committee would meet at the start of next month.
The Bank of England also declined to comment.
The BoE’s main formal forum for contact with the currency markets, the London Foreign Exchange Joint Standing Committee, is not due to meet until later in November and no additional meeting has been called to discuss the crash.
The BoE’s regular liaison with currency markets came under scrutiny in the course of a two-year investigation into market rigging that also saw the chief dealers sub-group of the committee closed.
BOE LIQUIDITY BACKSTOP?
The first source said that for now central bank officials responsible for overseeing events on the global currency market, the world’s biggest, were not concerned by the prospect of a repeat of the crash.
He also said it had not been ruled out that it was caused by market participants deliberately stepping in when the market was at its thinnest.
“If you were trying to move the market it was certainly the best time of the day to do it,” the source said.
“We certainly cannot rule out that there might be more moves like it. But in the end all of these events have pretty much returned pretty much to where they were. Here, if you went out for a well-timed coffee when you came back it was over.”
Both he and a third source with close ties to the Bank of England said that one issue was whether central banks should set up orders far away from market rates to prevent price crashes not justified by fundamentals.
“The Bank of England is not going to invest in its own algos (computer-driven machine trading) to oppose this sort of thing,” the third source said.
“The only thing you could think about is a liquidity backstop. You would have some levels in a machine far away from the market price, let’s say 5 figures off. In this case, for example, it wouldn’t have taken a lot to turn this around.”
On the day, sterling fell from around $1.26 to as low as $1.1491, according to Thomson Reuters’ Matching data, although several banks and platforms have chosen to regard the traded low as $1.1838 given the low volumes traded below that level.
“The interesting thing about this one is just that it was completely out of nowhere… … (and) did not spill over into any other currency, any other asset class,” the first source said.
Source: Reuters (By Patrick Graham, Editing by John Stonestreet)