Foreign-exchange markets are increasingly automated. Price movements between currencies can be captured as they happen and programme-trading systems have the capacity to trade without any human intervention at all. Nowadays, FX traders, whether human or automated, have recourse to automated post-trade reporting systems that deliver an updated report on their overall position much more quickly than used to be possible. And the speed of reporting is important: unless traders can track how their overall positions have been changed by a trade, they cannot continue to trade.
All of this is positive. Automation increases the speed of activity in FX markets as well as bringing costs down and increasing transparency. However, there is a potential downside. First, what are the ramifications of automation when there is an asymmetric shock to the financial system? If, for example, there is an upset in the US presidential election, or, say, Iraq blows up, it is reasonable to assume that a very large number of automated trading systems would implement sell-dollar orders. This would be likely to trigger a slide in the dollar that would in turn trigger a wave of stop-loss orders that would compound the slide.
