Was the pound’s flash crash caused by an algo?
The financial markets are a world unto themselves that ordinary people simply cannot understand – but we are all affected by movements in currencies and shares whether buying foreign currency for a holiday abroad or trying to maintain the value of our savings or pensions. So this week’s experience of the value of the pound on foreign exchanges should interest us all – even if we can’t understand it.
As explained in this “Guardian” article, in just 8 minutes, the value of the pound against the dollar plunged by more than 8% from $1.26 to $1,1491. What happened? There will be an inquiry but we may never know for sure.
The most likely explanation seems to be the operation of an algorithm or ‘algo’ which is a computer program designed to sell the pound when there is negative economic news including speculation about Brexit. The algos operate in micro-seconds with no human intervention. And they can feed off each other.
Another possible explanation is what is called a ‘fat finger’ trade where a dealer types an incorrect figure into their terminal – but this seems unlikely. Yet another possibility is some kind of technical factor such as ‘stop-loss’ arrangements where investors have pre-arranged orders to sell currencies that fall below a certain level.
In the everyday world of decision-making, the use of algorithms may seem weird or even scary, but there are many good reasons why clever algorithms are very, very useful, not least for giving you relevant feedback when you do a search on the web.
In fact, algorithms are used in all sorts of situations, as I have explained in this short article. I concluded the piece as follows:
“There are no easy answers but, for starters, citizens and consumers need the right to view and correct personal data, organisations need to be able to explain the basics of their algorithms and decision-making systems, and there should be effective appeal mechanisms involving humans against decisions based on algorithms.
We all need to have some understanding of what is going on with big data and of the power of algorithmic authority. Because, if you are not at the table, then you are on the menu.”