The Extraordinary Collapse In The Value Of Sterling

The Extraordinary Collapse In The Value Of Sterling
Sharm El Sheikh Egypt by Julian Cohen. Why?

Following the dramatic fall in the value of Sterling after the Brexit vote, Sterling lost another 8 per cent of its value in two minutes in October 2016, as the enlightening infographic below reveals

If Sterling Is Anything To Go By, Beware The Rise Of The Machines!

The Sterling Flash Crash 2016: How Did It Happen?

It’s estimated that roughly three quarters of all financial market volume is automated.  Algorithmic trading is the dominant player.  It includes the vast number of index tracker funds and EFTs.

The advantage is that markets are less volatile because they’re driven by computers instead of being controlled by humans who can occasionally be subject to irrational behaviour.

The disadvantage is that sometimes algorithms go wrong, or they do something unpredictable.  When Sterling crashed in October 2016, unpredictability (or perhaps the ‘law of unintended consequences’) was to blame, as you can see from the fascinating graphic below.

What happens is interesting, because it helps provide an insight as to how the piping works behind these trading algorithms.  It shows that when they go wild, market momentum can be swung in a particular direction even without your average market participants being involved.


The above graph shows the dramatic fall in the value of Sterling following the Referendum Vote on 23 June 2016, and the flash crash in October 2016.

A Change In The Nature Of Sterling

Following the Referendum vote in favour of Brexit, Sterling appears to have morphed into a “political” currency that seems to get most of its trading action based on commentary and speculation about the country’s eventual withdrawal from the EU.

On 6 October 2016, François Hollande said the UK must “pay the price” for Brexit. Trading algorithms reacted to this apparently negative news, triggering a Sterling sell-off. Once a massive knock-out option was opened and a certain price broke, it triggered a number of automated stop-loss sellers.

After a few other algorithms kicked in, Sterling plummeted from USD 1.26 to USD 1.1491 in just two minutes.  That’s a staggering 8 per cent slide in a globally significant currency.

Just 30 minutes later, the pound recovered to more normal trading levels.  The flash crash was just that – temporary.

The big question is what might happen in a more extreme case of algorithmic madness.  If the recently updated science-fiction thriller Westworld is anything to go by, it could well end in a bloodbath!


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