Market Functioning
Speech given by
Chris Salmon, Executive Director, Markets, Bank of England
January 24, 2017
Like many flash events, the sterling moves [of October 7, 2016] seemed to have no clear trigger – just unusually large selling flows at a typically quiet period of the trading day. Instead the BIS report characterises the moves as the result of a confluence of factors, including the time of day, significant demand to sell sterling to hedge options positions, the execution of stop-loss orders and the withdrawal of liquidity by both human and automated traders in the face of unexpected volatility. Whilst it is true that this event was over in less time than it would have taken me to buy my regular morning latte, and as the BIS report noted, no systemic financial institutions appear to have incurred material losses, the reality is that our ability to describe how the flash unfolded doesn’t mean we can explain why it happened on 7 October.
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So 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, even if I cannot hope to predict precisely when or in what instrument or currency pair the next significant flash event will occur.
The full speech is available here.