During the early morning hours of the Asian session on Friday, Asian traders experienced a dramatic move on GBP pairs, one that is the first of its kind in over a decade. GBP declined by more than 6% in a matter of few minutes before recovering at the end of the day. Many blamed high-frequency traders, Fat Finger and even the French President for his remarks about Hard Brexit. In this article, we explain what could be the most possible scenario.
In all cases, GBP was set to decline further over the next few months, as the central bank increased its asset purchases and cut the main rate to a new record low. Therefore, the bearish outlook was already in place. However, the speed of the decline was the issue because most major banks were anticipating a notable decline of 5% to 10% over three to six months.
Possible Causes of GBP Crash
- Political Remarks: many blamed the decline of the British Pound on Friday on the French President’s remarks. This could have been true if GBP declined by a hundred pips for example, but losing more than 6% in a few minutes makes it a less likely reason. What, then, could have caused this sharp move? It might have been a result of some large stops that were triggered during the initial move. When this happens, it does lead to some sharp declines as well.
- Fat Finger: This is known in the stock market more than it is in the FX market. Fat Finger means that someone sold a large amount of GBP by mistake. Mistake, in this case, refers to selling larger amounts than planned. However, when this happens, it is usually fixed quickly, and the price recovers almost immediately. Until this moment, GBP pairs remain below the levels attained when the crash happened.
- High-Frequency Trading: this might be the most possible scenario for the Flash Crash. High-frequency trading (HFT) is a type of algorithmic trading characterized by high speeds, high turnover rates, and high order-to-trade ratios that leverage high-frequency financial data and electronic trading tools.
Bank of England’s Role
There was no statement by the Bank of England announcing any intervention, but the bank announced that it asked the financial markets’ committee to look into the crash. This might take weeks if not months. In the end, nothing is likely to change because trading is back to normal.
What Do We Know?
As mentioned above, there are many possible scenarios for what might have caused this crash, but we could get more information on this when the Bank of England investigates the situation. Regardless, we surely won’t know the full story anytime soon. Will this change GBP’s outlook? The short answer is no. Flash crash doesn’t imply that the trend will resume or reverse.
What To Do Next?
Traders are always advised not to keep their trades open overnight without stop loss orders. Even with stop loss orders, sometimes, those stops won’t be filled. Therefore, if you are not watching your screen, try not to keep floating trades.
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