The UK investigation into October's "flash crash" in sterling has focused heavily on the Japanese trading operations of Citigroup, which fired off repeated sell orders that exacerbated the pound's fall, according to bankers and officials involved in the inquiry.
Citi's traders are not believed to have started the slide in the currency in thin Asia trading but its Tokyo desk played a key role in sending the pound to its lowest levels in 31 years, bankers and officials said. The value of the pound fell from $1.26 to $1.14, with a 9 per cent slide in about 40 seconds.
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.
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".
Human error and the use of a "poorly calibrated execution algorithm" were among the possible reasons for the sell-off, the BoE said, without naming any particular bank or banks. "It is hard to definitively rule out these possibilities as not all activity in the foreign exchange market is observable," the BoE concluded.
The BoE declined to comment on the role played by Citi or any other bank in the incident.
Typically, it is close to impossible for a small handful of trades to move a major currency by such a large degree, because there is usually a wide range of buyers and sellers at any time. But on October 7, the BoE noted that during the worst point of the fall in sterling, "there was a drop off in participation on key trading systems, which points to a potentially greater role for the idiosyncratic actions of individual market participants".
The BoE suggested the selling was too aggressive for market conditions at the time, noting that the flows "may have occurred without regard to underlying market conditions or [the] likely price impact of trading."
UK regulators are keen for banks to learn lessons from what went wrong on the night of the flash crash. The Financial Conduct Authority, which regulates markets, and the PRA declined to comment, but people privy to their work say they have since jointly written to a clutch of the market's biggest dealing banks, telling them to ensure they are vigilant on the risk of market dislocations at illiquid times of day and that electronic trading tools are equipped with proper safety features.
The Bank for International Settlements, which monitors global money flows, is working on its own detailed report on the crash, with input from the BoE, to be released in January.
Additional reporting by Chris Giles and Leo Lewis