Last Friday, around about the time that Tokyo opened for business, the British Pound plummeted dramatically in less than three minutes, recovering quickly by about 70% of its fall over the subsequent four minutes. The maximum fall was by approximately 700 pips, or a change of 5.5% in value, in the key benchmark GBP/USD currency pair.
This kind of huge, very rapid movement is known as a “flash crash”.
Different brokers were quoting wildly different low prices, but it is believed that no real trades were concluded below 1.2200, which therefore represents the “true low”.
The British Pound had been falling strongly all week, ever since the British Prime Minister announced that Britain would begin the process of withdrawing from the European Union during the early part of 2017.
There is a great deal of speculation as to what caused this “flash crash” but little in the way of concrete answers. The event has been compared to the CHF’s sudden and massive rise in value in an instant in 2015, which was triggered by a central bank announcement. However there was no obvious trigger in this case. It may be that the algos of big market players were just programmed to sell along with momentum and a strong snowballing effect kicked in. If so, this is very worrying, as markets that move by several percentage points in a matter of seconds or minutes cease to be regarded as real markets, and regulators have to step in.
Retail Forex traders need to be aware that if massive movements can occur this quickly in the currencies of even major global economies, leveraged Forex trading can become a highly risky business, as stop losses are usually slipped quite dramatically during these events.
The Bank of England is investigating, and has requested that the Bank of International Settlements assist them in their determinations.
A final tip: if you avoided trading against strong trends or currencies pegged by their central bank, you would not have been on the wrong side of this trade or the Swiss Franc trade in 2015 either.
