Flash Crashes & High Frequency Trading

7th October last year. A fairly typical, quiet and uneventful Thursday night, until the current markets suddenly turned chaotic.

In the space of just two minutes, Pound Sterling fell by 9% against the US Dollar. According to one foreign exchange trader, ‘All hell broke loose,’

It was a flash crash and later analysis found no “single clear driver” behind the event. Instead, it’s thought “a number of factors” had contributed to the crash.

These factors included computers reading an article in the FT, published online at precisely the time the flash crash started.

The article carried the headline ‘Hollande demands tough Brexit negotiations’, and featured quotes from a Thursday night dinner in Paris.

During the dinner, the French president, Francois Hollande, announced that Britain would have to ‘suffer’ for choosing to leave the European Union. He said ‘There must be a price’ for Brexit.

Did computers read that article and start selling the pound, triggering this flash crash?

In order to better understand the relationship between fintech, high frequency trading and flash crashes, I interviewed expert Irene Aldridge.

Irene is author of the new book Real-Time Risk: What Investors Should Know About Fintech, High-Frequency Trading, and Flash Crashes. It’s the first book to show regular, institutional, and quantitative investors how to navigate intraday threats and stay on-course.

We talked about how computers are now using natural language processing to read the news and process this information very quickly.

We talked about how investment markets have changed, with the rising importance of a micro market structure.

Think back only a few years when investment data was limited to a few lines a day old in the Financial Times. Fast forward to today and investors have access to detailed minute-by-minute data, allowing traders a real insight to intraday activity.

Irene also revealed the real cause of flash crashes; not high frequency trading, but the interconnectivity of investment markets, largely due to the rising popularity of Exchange Traded Funds (ETFs).

You can listen to our conversation in full and download the transcript at www.icradio.co.uk/flashcrash.

For anyone interested in how the investment markets are changing in light of developing technology, it’s a must listen.

Informed Choice Radio is the personal finance podcast all about achieving your financial goals and living a better life. New episodes are published every Monday, Wednesday and Friday morning. Subscribe today on iTunes or Stitcher Radio.