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GBP’s “Flash Crash” Explained

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The GBP has been under pressure since Theresa May’s speech at the Conservative party conference. However, last Friday just after twelve midnight in the UK the British pound dropped a massive 8% (to a 31-year low) but recovered very shortly afterwards. This is what has been named by traders and the media as the “flash crash”.

General market sentiment believes there were several senarios which caused this "flash crash".

  • 1st senario: The big fat fingure, which suggests there was an error by a broker or a dealer in entering a trade using a wrong rate or volume, this is not unheardof in the financial markets and has happened before which can lead to a drop or increase in rates without a clear reason
  • 2nd senario: Automated trading, which suggests there was a drop in the GBPUSD rate to a level where cluster of automated stop losses were filled took the market down
  • 3rd senario: There was automated algorethmic trading software which started trading during a low volume session which took the market down, the spark for the algorethmic trading may be caused by the comments from Francois Hollande demanding the UK pay a heavy price for deciding to leave EU. The Bank of England was quoted saying: “We are looking at the causes of the sharp falls overnight” but as it currently stands no official explanation has yet been released.

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