The British pound sterling (GBP), already seen trading at historic lows against the euro (EUR) and the US dollar (USD), crashed 6% within 2 minutes on Friday, when most of the UK was asleep.

In reality, the intraday fall was almost 10%, as the currency had touched a low of $1.1378, nevertheless, the trades were cancelled as rogue trades and the total fall was restricted to $1.1841.

"This was even a bigger move than what we saw after the Brexit vote. There were almost no offers, no bids when this happened," said a trader at a European bank in Tokyo, reports the Business Insider.

"It is possible some opportunistic hedge funds, model-based accounts including algorithmic traders, seized the chance to capitalise on the thin market liquidity and aggressively sold GBP/USD, triggering a series of stop-loss orders," said Mr. Grace, CBA's head of currency strategy, reports The Australian.

Reasons for the British pound's flash crash

Though there are many theories doing the rounds, it is difficult to pinpoint the exact reason. "It's difficult to know exactly what triggered it," Angus Nicholson, market analyst at IG in Melbourne, told the BBC.

A forex algorithm gone wrong

Algorithm trading is popular and one finger points to an algorithm, which might have been programmed to trade on any major negative Brexit headline.

Just around that time, the Financial Times had reported the French President, François Hollande's warning that Britain should suffer for Brexit, to deter the others from leaving the EU.

Kathleen Brooks, the research director at the financial betting firm City Index, said: "Apparently it was a rogue algorithm that triggered the sell off ... These days some algos trade on the back of news sites, and even what is trending on social media sites such as Twitter - so a deluge of negative Brexit headlines could have led to an algo taking that as a major sell signal for the pound. Once the pound started moving lower then more technical algos could have followed suit, compounding the short, sharp, selling pressure," reports The Guardian.

Thinly traded currency exchange markets can be manipulated

The pound-dollar pair is the third most traded currency pair, according to the Bank for International Settlements, and it makes up 9.2% of all the trades in the $5.1 trillion currency market. Nonetheless, the liquidity is not equally distributed during the day.

The crash happened at 7 a.m. Singapore time, after New York had closed and London was in a deep slumber at midnight.

An analyst termed it "twilight zone" for the foreign exchange market, as a few sellers can move the markets.

Bloomberg reports that the bid-ask spread jumped to 250 times its median during the past year, which shows the lack of liquidity in the markets.

The large banks have pulled back from the dealing, due to increased regulations.

This leaves fewer traders to take the opposite of the trade, leading to more frequent flash crashes in recent times.

The tripling of algorithm trading in the past three years has also exacerbated the situation.

"In the post-GFC (global financial crisis) world, we are making individual institutions more resilient, but systemically instability still persists," said Nick Parsons, a currency strategist with National Australia Bank in London."We're seeing a very rapid game of pass-the-parcel and machines playing pass-the-parcel can do it much more quickly than 10-year olds at a birthday party," reports CNBC.

Fat finger triggering stop loss orders

Though a few believe that an erroneous order, by mistake, could have started the fall, which later set off the other computerized sell programmes or would have caught the stop loss orders in the system, which led to the crash.

tomele » Wed Nov 23, 2016 3:12 pm wrote:We will never know the exact reason. But there are some more or less plausible explanations. Here is a good summary by exchangerates.org.uk:

The British pound sterling (GBP), already seen trading at historic lows against the euro (EUR) and the US dollar (USD), crashed 6% within 2 minutes on Friday, when most of the UK was asleep.

In reality, the intraday fall was almost 10%, as the currency had touched a low of $1.1378, nevertheless, the trades were cancelled as rogue trades and the total fall was restricted to $1.1841.

"This was even a bigger move than what we saw after the Brexit vote. There were almost no offers, no bids when this happened," said a trader at a European bank in Tokyo, reports the Business Insider.

"It is possible some opportunistic hedge funds, model-based accounts including algorithmic traders, seized the chance to capitalise on the thin market liquidity and aggressively sold GBP/USD, triggering a series of stop-loss orders," said Mr. Grace, CBA's head of currency strategy, reports The Australian.

Reasons for the British pound's flash crash

Though there are many theories doing the rounds, it is difficult to pinpoint the exact reason. "It's difficult to know exactly what triggered it," Angus Nicholson, market analyst at IG in Melbourne, told the BBC.

A forex algorithm gone wrong

Algorithm trading is popular and one finger points to an algorithm, which might have been programmed to trade on any major negative Brexit headline.

Just around that time, the Financial Times had reported the French President, François Hollande's warning that Britain should suffer for Brexit, to deter the others from leaving the EU.

Kathleen Brooks, the research director at the financial betting firm City Index, said: "Apparently it was a rogue algorithm that triggered the sell off ... These days some algos trade on the back of news sites, and even what is trending on social media sites such as Twitter - so a deluge of negative Brexit headlines could have led to an algo taking that as a major sell signal for the pound. Once the pound started moving lower then more technical algos could have followed suit, compounding the short, sharp, selling pressure," reports The Guardian.

Thinly traded currency exchange markets can be manipulated

The pound-dollar pair is the third most traded currency pair, according to the Bank for International Settlements, and it makes up 9.2% of all the trades in the $5.1 trillion currency market. Nonetheless, the liquidity is not equally distributed during the day.

The crash happened at 7 a.m. Singapore time, after New York had closed and London was in a deep slumber at midnight.

An analyst termed it "twilight zone" for the foreign exchange market, as a few sellers can move the markets.

Bloomberg reports that the bid-ask spread jumped to 250 times its median during the past year, which shows the lack of liquidity in the markets.

The large banks have pulled back from the dealing, due to increased regulations.

This leaves fewer traders to take the opposite of the trade, leading to more frequent flash crashes in recent times.

The tripling of algorithm trading in the past three years has also exacerbated the situation.

"In the post-GFC (global financial crisis) world, we are making individual institutions more resilient, but systemically instability still persists," said Nick Parsons, a currency strategist with National Australia Bank in London."We're seeing a very rapid game of pass-the-parcel and machines playing pass-the-parcel can do it much more quickly than 10-year olds at a birthday party," reports CNBC.

Fat finger triggering stop loss orders

Though a few believe that an erroneous order, by mistake, could have started the fall, which later set off the other computerized sell programmes or would have caught the stop loss orders in the system, which led to the crash.