Belfast Telegraph

Global financial markets will face more 'flash crashes'

Global financial markets will face more "flash crashes" in line with sterling's sharp fall in October , according to a top Bank of England official.

Bank executive Chris Salmon said the foreign exchange markets had functioned effectively when it came to a "well-telegraphed" event such as the Brexit vote, but had experienced a "dearth of liquidity" during sterling's "flash crash" in October.

He said central banks must tighten their focus on areas of the financial markets that can make currencies more vulnerable during a flash event.

In a lecture for the Official Monetary and Financial Institutions Forum, Mr Salmon said: "While recent events fortify my confidence in the ability of core financial markets to process identifiable risks, I equally expect flash moves in the self-same markets to continue to surprise us."

However, he said he could not predict precisely where and when the next flash event would occur.

Badly managed automated computer trading platforms and inexperienced currency traders in Asia helped drive the pound's slump in the early hours of October 7.

The findings from The Markets Committee at the Bank for International Settlements (BIS) earlier this month said sterling's 9% plunge against the US dollar was the outcome of a string of events, exacerbated by the fact that the crash occurred during Asian trading hours, thereby increasing sterling's vulnerability.

However, there were no deep losses in the wake of the crash and spillovers to other markets were very limited.

Mr Salmon, the Bank's executive director for markets, said central banks needed to deepen their understanding of the areas of modern market structures that " exacerbate these vulnerabilities".

"In particular, we need a deeper understanding of the potential for flash events to have longer-lasting consequences than has been the case so far.

"That would increase the potential systemic costs of flash events and increase the case for some form of public policy response."

He said the Bank's Financial Policy Committee (FPC) would examine how the fallout of "flash crash" events could impact financial stability.

The comments come after BIS warned earlier in January that currency traders should ''fine tune their systems'' and take greater care over trading during times of poor liquidity amid fears that another ''flash event'' could undermine confidence in financial markets and knock the UK economy.

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