DavidBelleFX

Why did the GBP drop 6% last night?

FX_IDC:GBPUSD   British Pound / U.S. Dollar
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If you were trading during Asia, you'd have noticed that the GBP fell by a massive 6%. This gives me a chance to explain two options that are the most probable causes . Let me say firstly that Hollande's comments had nothing to do with the fall.

The first and most probable cause is that volume chasing algorithms were the cause. These are interbank algorithms that can view the book. It's not something retail should worry about because not one of us has the capability to trade with the minute spreads or timeframes that these trade at. However, you should be aware of them.

These algorithms can get confused with each other. If one starts chasing an abnormal volume action then the others can follow. If you have a situation where a lot of the big boys are doing this then you can have a flash crash akin to what happened last night. You get an illiquid market as the pressure of one direction means that bids and offers are not matched equivalently because of the algo confusion. You then get a liquidity vacuum in one direction and a 6% drop .

Less likely is that someone during the more illiquid Asia session entered the wrong price or order size, causing the market to fall. However I say this is unlikely because it would require a huge order to move the market in that fashion. Also, you would be able to see this non iceberg (order type) order on the book and traders would simply absorb it up.

This is why I think algos were the cause of this flash crash.

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