From Asia With Love, or What Happened to the Pound?

GBP

This has not been a good week for the British pound, with the biggest shock hitting it overnight (Asian morning session), when the UK currency fell down further by 6%, dropping to its lowest in over three decades. While currency losing value quickly is not uncommon in the global market, the latest ‘flash crash’, has been truly amazing, and experts worldwide are now all scrambling to find the answer to the same question: What was THAT?

Earlier this week…

The Pound has been losing its value for months following the Brexit referendum.This week didn’t go well for the UK currency as it started falling further after Theresa May’s weekend speech related to Brexit and the timeline for the UK to leave the European Union. As markets made it clear, the UK was heading for the ‘hard Brexit’, and market players were bracing for a further fall of the Pound.

Last night

The shock came last night (GMT+03:00), or during the Asian morning session when the British currency slided from $1.26 through $1.25 to as low as $1.1819 within 3 minutes, based on Reuters data, according to Financial Times. Within the next 30 minutes, the pound regained its strength back only back to $1.24.  

The nearly 8 figure drop for the pound is a huge plunge with the currency market prompting hundreds of questions and theories. While the first explanation to appear early this morning were guesses that the ‘flash crash’ was triggered by an algorithm of automated trading or even ‘fat fingers’ (basically when a big trader makes a typo in the order-  believe it or not, these things happen), it seems like an error would be too easy of an explanation. Could it be a simple mistake?

Great Technology Gone Bad?

There may be some truth behind the ‘automated trading’ gone bad theory, as pointed out by BBC. As if the British Pound didn’t have it bad enough, the French President Francois Hollande demanded  “tough Brexit negotiations”- even by itself this statement would have probably caused the British currency to weaken further. Curiously, the crash took place almost simultaneously after the story break out by Financial Times. This very timing has led analysts to speculate that the fall was a result of a computer algorithm performance which was reading the news.

According to BBC and the input it received from analysts, a computer may have been set to scan the news for negative Brexit stories, with the order to sell if it found any. Yes, this is how it works with trading algorithms: this software is designed to trade automatically and can react much faster than human traders.

“Possibly a keyword or newsflow-focused algorithm started the selling in the pound based on that article, and other algorithms may have seen the volume and momentum coming into the pound at what is normally a relatively low volume time,” Angus Nicholson, market analyst with IG in Melbourne, told the BBC.

What Else Could It Be?

Analysts were quick to point out the time of the crash: it happened just after 7pm in New York, which was 7am in Hong Kong and Singapore, 8am in Tokyo and 10am in Sydney. Keeping in mind that Singapore, the biggest Asian liquidity center, wasn’t trading at that time and New Yorkers have just gone home, the timing suggests that the plunge has been made deliberately by a market manipulator (as only Tokyo and Sydney were open). There isn’t enough evidence to support this, and market manipulation of this magnitude is hard to prove in a market as decentralized as forex, especially when it comes to Asia.

Other theories point out that the fact of the crash happening on a Friday, the day Options tend to expire. This can cause sharp trading moves if banks, the writers of those Options, need to hedge themselves against a big drop in a currency (not sure what ‘hedging’ means? Take a look at this post). Basically, banks may have rushed to protect themselves from losses by selling the Pound before the week ends. If this is the case, it certainly didn’t go well.

It’s midday Friday, and we still don’t know what happened to the British Currency overnight. While the Bank of England made a statement it’s looking into the ‘flash crash’, analysts are puzzled with what REALLY happened during the Asian morning session today.

 

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