How befuddling has the process of the U.K. exiting from the European Union been for financial markets? Perhaps, the Brexit insanity can best be encapsulated by a recent Reuters article, which reports that computers designed to trade on Brexit-related news have been flummoxed by the barrage of recent headlines that at times appear to be contradictory.
The Reuters piece says that a portion of the roughly $5 trillion-a-day global currency that has been controlled by computers, which are modeled to watch for key words from media sites about the U.K.’s divorce from the EU and trade off of that information, are being whipsawed by thousands of daily headlines on the subject from the likes of Bloomberg, Reuters and other outlets (including this one).
Check out: Brexit Brief: May and Corbyn continue talks after no-deal bill passes by one vote
Read: MarketWatch’s Brexit articles
The Reuters article spotlights the growing use of machine-driven trading on Wall Street that hasn’t just been a feature in the currency markets but also in stocks and other asset classes.
Roughly 85% of all equity trading now is driven by computers using complicated models, or directives to buy or sell assets, according to a December report by The Wall Street Journal. Citing the Bank for International Settlements, Reuters reported that some 70% of all currency trades on the Electronic Broking Services, or EBS, platform, a popular venue for foreign-exchange and fixed-income trading, was via algorithms.
The twists and turns of Brexit may be an ideal case to highlight the challenges of trading on fast-moving narratives for human or machines. Algorithmic trading broadly has long been referred to as the bane of Wall Street, often blamed for sudden and severe market hiccups, including a 2016 flash crash in the pound.
Prime Minister Thersa May’s inability to find support for her Brexit deal and Parliament’s inability to agree on an alternative plan have been behind intraday price swings and concerns about a so-called hard Brexit, in which the U.K. exits the European Union with an agreement governing the relationship between the two entities.
Marc Chandler, chief market strategist at Bannockburn Global Forex, told MarketWatch that new technologies, including news readers/scrapers, have helped to boost the use of computers and artificial intelligence in the currency trading market. However, he said that doesn’t mean the machines are infallible. “They get it wrong as well,” he said, referring to computer-driven trading.
That said, Chandler explained that volatility has become a more consistent part of sterling trade even as traditional speculators have moved to the sidelines amid the uncertainty surrounding outcomes for Brexit.
Recently, May has been in talks with opposition leader, Labour’s Jeremy Corbyn, ahead of the an EU summit next week, where she has said she would request a delay to the U.K.’s scheduled exit from the EU on April 12. An original Brexit deadline set for March 29 already was previously extended.
On Wednesday, U.K. lawmakers voted to force an emergency bill through parliament to avoid a no-deal Brexit, which passed 313 to 312.
All that said, moves by major currencies, particularly the British pound against the U.S. dollar, have been relatively muted. On Thursday, the British pound GBPUSD, -0.6991% was 0.6% lower, trading at $1.3075 versus the dollar, compared with $1.3160 late Wednesday.
That’s even as Bank of England Gov. Mark Carney deemed the chances of a no-deal Brexit scenario as “alarmingly high.” May is racing to solve the Brexit issue before May 22 so the U.K. can avoid taking part in European elections.
The U.K.’s benchmark stock market FTSE 100 Index UKX, -0.22% ended 0.2% lower on Thursday but still stands not far from its highest levels since October. Meanwhile, across the pond, the Dow Jones Industrial Average DJIA, +0.46% and the S&P 500 index SPX, +0.04% were trading around 2% short of their records, shaking off much of the Brexit drama in favor of upbeat expectations over U.S.-China trade talks.
Read: Why a European slowdown poses a bigger risk to the stock market than China trade
“As far as equities — there has been a limited effect [from Brexit] because the China trade issue is still number one issue there,” J.J. Kinahan, TD Ameritrade, chief market strategist, told MarketWatch.
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