Quick Death in GBP

On October 7, 2016, the GBP crashed in Asian morning trading hour, decreased by 6.1% in just two minutes, and touched the lowest point of 1.1821 since 1985, causing a great amount of liquidation.

This flash crash in GBP is memorized as the most shocking plunge in GBP forex trading history, which is more impressed than the 11% falling after the outcome of the Brexit referendum was released. It is remarkable that the flash crash happened within two minutes. However, traders suffered the losses with the reason for the flash crash remained unclear. Therefore, various institutions and traders can't wait to analyze the cause of the flash crash.

This flash crash of the Pound is a typical UFO incidence that arose the enthusiasm in finding the truth. After the incident, various speculations and analyses have also been released. Everyone believes that this flash crash was caused by multiple factors. Some people think it was due to an incorrect instruction input of the “fat fingers”, while some others regard the incident as the outcome of a deliberate stress test carried out by the leading hedge funds to verify the bottom line of the Pound against the Dollar. Some people believe that the poor fundamentals of the UK were reflected in currency performance. Most people believe the time of the transaction and the influence of algorithmic trading have aggravated the outcome. The Pound's collapse occurred in early Asian trading when markets of Europe and the Americas were in off-peak and when the Japanese market was not open. At this time, a large number of market stop orders were triggered, and buyers could not be found in a very short period. So the price fell rapidly when the market liquidity was low. About ten minutes later, the market realized that this was a good arbitrage opportunity when these orders were extremely underpriced. Then the liquidity gradually recovered, and the Pound rebounded.

In this case, a BIS report stated that the flash crash could be explained as “inexperienced” traders have limited knowledge of which algorithm to use at that particular moment, which “magnifies” the decline in the Pound. The increase in the proportion of rookies with lower salaries is one of the main factors for the flash crash.

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