Citi says behaved appropriately in sterling "flash crash"

By Patrick Graham

LONDON (Reuters) - Citi said on Wednesday that its trading operations functioned appropriately in a thin and illiquid market during October's "flash crash" in sterling, responding to a Financial Times report that a trader at the U.S. bank exacerbated the pound's fall.

The FT cited unnamed bankers and officials as saying that Citi's traders were not believed to have started the slide in the currency but that its Tokyo desk played a key role in sending the pound to its lowest levels in 31 years.

"Sterling fell sharply following a news event just after midnight UK time, when the GBP spot foreign exchange market was extremely illiquid," Citi, the biggest player in the $5 trillion a day global currency market, said.

"Citi managed the situation appropriately and our systems and controls functioned throughout the period."

The Bank of England and the Bank of International Settlements, whose markets committee is overseeing an investigation into the crash with input from the BoE, had no immediate comment on the Financial Times report.

The pound dived and rebounded by about 10 percent in a few minutes at the start of Asian trading on Oct. 7, an unprecedented swing for a major currency at an hour when the market is at its lowest ebb.

The moves added to the hefty losses the pound has suffered since June's British vote to leave the European Union. There were also some sales of UK assets by investors worried over the stability of the currency and its impact on inflation.

Market participants generally agree the sell-off was at least worsened by the algorithmic machine trading that makes up much of the global currency market, while some have speculated the initial move may have come from electronic news gathering software or other parameters used in trading programmes.

The final report from BIS is due in January, although officials say it will probably focus on how the market as a whole functioned and it is not clear if it will discuss the role of particular institutions and orders in the slide.

(Reporting by Patrick Graham, editing by Nigel Stephenson/Jermey Gaunt)