GBP "flash crash" post-mortem: 4 reasons for the plunge

October 7, 2016 09:03 AM


After the low-liquidity "summer doldrums" of July and August, it felt like forex traders would do anything for some volatility in the market. Perhaps they should have been careful what they wished for.

At 23:07 GMT (7:07 PM ET) on Thursday, October 6, the British pound/U.S. dollar (GBP/USD) currency pair started falling from its established level around 1.2600. The selling snowballed a couple of seconds later on the break of the 1.2500 level as the pair hit an air pocket in the low liquidity post-North-American, pre-Asian session "twilight zone." By the time the selling avalanche subsided at 23:09 GMT, the world's fourth most-traded currency had fallen a staggering 800 pips, or over 6%, in just two fateful minutes.

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‚ÄčAs of writing on Friday morning the pound has recovered somewhat, but not completely. GBP/USD is still holding below 1.2400, suggesting that the overnight collapse wasn't entirely due to a temporary market anomaly; in other words, the pound still faces serious headwinds and may still fall further in the days to  come.

So what happened?

Our innate desire to understand forces us to ask the question, but we want to note at the outset that pinpointing a single "cause" for the pound's "flash crash" is a fool's errand.

It's not a coincidence that we used words like "snowball" and "avalanche" when describing the price action. Just like in a physical avalanche, a tiny snowflake can lead to a massive cascading reaction that dwarfs the initial "catalyst" if the conditions are right. When it comes to the pound's avalanche of sell orders, the conditions were ripe for a massive washout:

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About the Author

Senior Technical Analyst for FaradayResearch. Matt has actively traded various financial instruments including stocks, options, and forex since 2005. Each day, he creates research reports focusing on technical analysis of the forex, equity, and commodity markets. In his research, he utilizes candlestick patterns, classic technical indicators, and Fibonacci analysis to predict market moves. Weller is a Chartered Market Technician (CMT) and a member of the Market Technicians Association.