In my initial Pentagon report and first book, Secret Weapon, our research indicated that currencies would become perhaps the third battleground in this ongoing global economic war. In this blog we have documented how Russia and China have called for ending the United States dollar as global reserve currency. Even Secretary of State John Kerry has admitted that this idea “is bubbling out there.”
We have also warned about the adoption of High Frequency Trading (HFT) in the currency markets. High Frequency Trading has proven catastrophic at times in the stock market with things like the flash crash. A “digital bomb” was placed inside the NASDAQ systems by Russia. The Russians have even boasted about the ability to crash our stock market. Even the Syrian Electronic Army was able to cause more than a $100 billion drop in the markets by hacking the AP Twitter feed and tweeting a message intended to cause “SELL, SELL, SELL” reactions by the HFT computers. Despite these realities, HFT is being adopted in the currency markets.
Last week we saw something very frightening. The British Pound had its own “flash crash,” dropping 6% in a matter of minutes. From CNN:
The British pound suffered a jarring flash crash on Friday, nosediving more than 6% against the dollar in a matter of minutes. The shock move in early trading in Asia left investors stunned and analysts blaming computerized trading programs for intensifying the dizzying drop. “It was just another quiet day in Asia, and then, Bang! All the lights went red,” said Matt Simpson, senior market analyst at ThinkMarkets in Singapore.
If the Russians are willing to hack our elections and Putin wants to destroy the dollar, is there any doubt that our currency could be put at risk? Terrorist hackers are trying to crash our electric grid. Is there any doubt they’d like to crash our currency? Or, what if a hacker wanted to make our currency too strong to destroy our exports or advantage theirs?
In history, we have seen speculators like George Soros target the British pound. He is known as the man who “broke the Bank of England.” And, we know that the Chinese authors of Unrestricted Warfare said that financial warfare would be modeled after George Soros. This is very frightening. What if a nation state with vast resources were to apply the same techniques?
One of the problems of HFT is that it is extremely hard to untangle in the event of a crisis. We still don’t really understand exactly what happened on May 6, 2010 when the Dow Jones Industrial Average dropped almost 10% in minutes. The blame was ultimately placed on a single trader outside London. Really? If that’s true it is very scary. And don’t forget that there’s always the risk of someone taking the HFT trading codes of a major player like Goldman Sachs. If manipulated, these codes could cause otherwise upstanding firms to trigger a crash unknowingly. The idea that this could happen with currencies is very frightening indeed.
The dollar’s global value will undoubtedly be influenced by fundamental factors like interest rates, growth, and Federal Reserve policy. But sometimes these factors are not the primary determinant of success or failure in a currency.
On October 1, the International Monetary Fund (IMF) recently added the Chinese yuan as a reserve currency to their Special Drawing Rights (SDR). The Chinese have made it known that they would like the SDR basket of currencies to replace the U.S. dollar. This is certainly a delicate point in history for the risk of High Frequency Trading to let computers run amuck.