The Bank of England has said publicly that the October 7 crash is "set apart by the lack of a clear fundamental trigger" but its investigation of the event focused on a single incident, according to a person briefed on the probe.
People with knowledge of events at Citi that day said one of the US bank's traders placed multiple sell orders when the currency slumped in unusually fragile market conditions. One of the people said the trader "panicked".
The incident raises questions on the quality of supervision and risk management at the biggest bank in the foreign exchange business. In the wake of the crash, UK regulators have written to several banks telling them to shore up oversight of the foreign exchange desks to prevent similar shocks.
Citi said in a statement that it "managed the situation appropriately and our systems and controls functioned throughout the period". It declined to say whether anyone had been disciplined or whether it had changed any trading practices in light of the incident.
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Investigators from the BoE's Prudential Regulation Authority who probed the October 7 drop were not particularly concerned by the initial trigger, people briefed on the inquiry said. Jerky moves are not uncommon in the dead of night, and sterling was on a fragile footing with support undermined by the impact of the vote to leave the EU.
But people involved in the investigation said the second stage of the slide coincided with a large number of rapid-fire sell orders placed in Tokyo by a Citi trader using an electronic tool known as "Aggregator", which sends trade instructions into a range of trading venues. A trader at another bank said at the time that was when "all hell broke loose" with the pound.
For a short time, orders to sell sterling met with zero buying interest on the other side — a highly unusual event — due to abnormally poor liquidity and entrenched bearishness about the pound in the wake of the Brexit vote.
Nonetheless, the sell instructions from Citi's desk in Tokyo kept coming and started tripping over each other in a pattern known as "looping" that is normally constrained by safety nets embedded in bank trading tools. Citi declined to comment on whether those safety nets, which are part of the Aggregator programme, were operating at the time of the flash crash for its own traders.
Citi was not the only trading desk selling at that point, and the bank was not seeking to make a profit, multiple people briefed on the events said. Rather, they said, the trader panicked, jamming through enough trades to magnify the slide.
A Citi spokeswoman said the drop in sterling followed "a news event" at an "extremely illiquid" time of day, a reference to a Financial Times report that night that President François Hollande of France had said he would seek a tough line on Brexit. The BoE, however, said in its semi-annual financial stability report that the FT news story "was not the initial trigger".