(Adds more on central bank investigations, response)
By Patrick Graham
LONDON, Jan 24 (Reuters) - Investors should expect further “flash crashes” in major financial markets like the Oct. 7 slump in the British pound, the Bank of England’s executive markets director Chris Salmon said on Tuesday.
In a lecture at the central banking forum and think-tank OMFIF, Salmon also said the BoE and other regulators needed to do more to understand such events and the risk of longer-lasting consequences for financial stability.
Such work might support the case for public institutions to take action to deal with crashes, he said.
“While recent events fortify my confidence in the ability of core financial markets to process identifiable risks, I equally expect flash moves in the self-same markets to continue to surprise us,” Salmon said.
He said he was unable to predict precisely when or in what instrument or currency pair the next significant flash crash would occur.
Sterling sank and rebounded around 10 cents within a few short minutes in thin Asian trading on Oct. 7, sending ripples through the banking sector and spurring another round of selling of the pound in the hours that followed.
Central banks, discussing the issue through the Bank of International Settlements since then, have stopped short of any moves to actively intervene in otherwise freely-traded markets to prevent future crashes.
But officials say privately that discussions have begun on what if anything can be done.
“We need a deeper understanding of the potential for flash events to have longer-lasting consequences than has been the case so far,” he said.
“That would increase the potential systemic costs of flash events and increase the case for some form of public policy response. In the Bank’s context that helps explain why the Financial Policy Committee is seeking to examine the potential implications of these developments for financial stability.” (Reporting by Patrick Graham; Writing by William Schomberg; Editing by Gareth Jones)