TECH TUESDAY: Trading Algorithm Creates Flash Crash in British Pound

A blur picture of a blocked way giving the feeling of an instant before the crash
A blur picture of a blocked way giving the feeling of an instant before the crash

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Perhaps you are aware of the somewhat volatile situation across the pond, but just in case you missed it, the United Kingdom—England, Scotland, Wales, Northern Ireland—is preparing to leave the European Union. This somewhat controversial decision , labeled “Brexit” by the political parties involved, has taken quite a toll on the British economy. The value of the pound remains near a 30-year low. Britain lost their top AAA credit rating, meaning the cost of government borrowing will be higher. Brexit supporters have promised that things will right themselves. Eventually. So far, 2016 has not been kind to the pound sterling.

Earlier in October, for example, the British pound sterling decided to take a plunge. A rather dramatic one, at that. This momentary drop of about 6% lasted for less than a second, but the plummet was enough to grab everyone’s attention. After searching and researching exactly what happened, this dip apparently was caused by an algorithm, a process of operations carried out by a computer and, in some case, interpreted by other computers. Usually when algorithms are in place, examples like how Google returns search results or how Facebook customizes your News Feed, people know that an algorithm is at work. What was happening during this 6% drop was a rogue algorithm, and yes, they are not supposed to be in a system at any time. Rogue algorithms have one mission: to cause havoc in foreign exchange markets. They manipulate automatic trading systems in order to take advantage of investing into currency when it’s low in order to make immediate profit on its lower price.

Economic Financial Crash GraphThe problem is that rogue algorithms are hard to find as algorithms are used quite often in trading settings. These routines can be used to solve all kinds of problems, often used to execute a sequence of moves towards achieving a particular end goal. This rather devious algorithm appeared as a harmless series of commands programmed to pick-up overnight news flow. If this algorithm picked up a keyword indicating something bad was about to happen, it would short a sector. What exactly does that mean? “Shorting a sector” means the algorithm will predict that this particular sector will go down in value. If value goes down, investors can make money. Buy low, sell high.

This rogue algorithm picked up the words “hard Brexit” as the French president said they are going to make it really hard for Britain to leave the EU. This “hard Brexit” instance triggered the command to short the pound, so much like the aggressive floor brokers of the New York Stock Exchange, the algorithm placed “bets” all over the Internet that shorted the pound that created a flash crash sending the pound sterling to a new low.

You would think “But it was for less than a second…” but as we’re also talking about computers, the creators behind this rogue algorithm made money in that blink of an eye.

Presently, economists, IT professionals, and cybersecurity experts are trying to work out how they can protect financial infrastructures from these rogue algorithms. It’s a wake-up call akin to what happened only ten days ago when Twitter, PayPal, and other popular websites found themselves under attack.  Security can no longer be an afterthought. Otherwise, we will constantly be one step behind cybercriminals; and by the time we have a solid defense against one form of malware, two more will be unleashed.

Hopefully, October—the month of Cybersecurity Awareness—has been more than just about bringing attention to digital safety. Hopefully, it’s also been a hard lesson on how prepared we have to be.

 


 

shurtz.jpgA research physicist who has become an entrepreneur and educational leader, and an expert on competency-based education, critical thinking in the classroom, curriculum development, and education management, Dr. Richard Shurtz is the president and chief executive officer of Stratfdord University. He has published over 30 technical publications, holds 15 patents, and is host of the weekly radio show, Tech Talk. A noted expert on competency-based education, Dr. Shurtz has conducted numerous workshops and seminars for educators in Jamaica, Egypt, India, and China, and has established academic partnerships in China, India, Sri Lanka, Kurdistan, Malaysia, and Canada.

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