JP Morgan warns that the next financial crisis will be caused by sudden market crashes, as wholesale trading systems are failing and causing uncontrollable sale
James Burton for the daily mail
Walking into oblivion: the study claims that flash crashes can become more frequent
The next financial crisis will be caused by sudden market crashes, as wholesale systems are failing and cause uncontrollable sale, JP Morgan warned.
In a report on the risks of markets, Wall Street bank analysts point to previous so-called flash crashes, with computer programs that were automatically sold launching a wave of sales.
The study claims that these flash accidents could become increasingly frequent, as trade is increasingly dominated by machines – leading to sudden movements that are impossible to predict.
Author Marko Kolanovic said that investors have moved around £ 1.5 trillion from traditional stock selection funds to passive funds seeking to follow the broader market using computers instead of defeating.
As a result, when there are crashes, less money is available for traders who want to capture cheap shares and stop a fall. This means that price decreases may be longer and may be less controlled than in the past.
Kolanovic said: & # 39; Basically you have groups of investors who are purely mechanical. They sell certain signals and not necessarily about fundamental developments, such as simple price action. This means that if the market drops 2 percent, then they have to sell.
"Suddenly, every US pension fund is severely underfunded, retail investors are panicking and selling, while individuals stop issuing," he said.
He warned that if this unrest would drive 40% of the markets down, it could cause severe depression and force central banks to step in.
Kolanovic said: & # 39; If they do not succeed, you fall into depression, social unrest and many more disruptive changes. & # 39;