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& On Friday, the pound plummeted .% in two minutes, shocking the market, but it seems that no possible reasons can explain such a large drop. Therefore, many people believe that computer-programmed trading is behind this, which has once again aroused people's attention to related issues.
Explaining what's happening in the foreign exchange market is Sydney executive Derek Mumford's bread and butter, but this time he can't do anything about it. Sterling plunged more than % in just two minutes in early Asian trading on Friday, sending the world's fourth-most traded currency to year lows.
Mumford, who provides foreign exchange and interest rate risk consulting services to companies, is scratching his head and can't figure out why. Some say this is because French President Hollande has taken a tough stance on Britain's "Brexit" issue, while others say this is an "own error" trading operation. However, neither explanation can explain such a large decline. Mumford said: "There are no speculative reasons for such a sharp decline. &r
While Mumford may never be sure of the origin of the plunge, he and his peers agree that it was likely exacerbated by trading in computer programs.
In the foreign exchange market, so-called algorithmic trading has tripled in the past three years, with about $100 million in daily transactions involved, according to the Boston Consulting Group.
The British pound is one of the oldest traded currencies in the world and remained the dominant reserve currency until the first half of the century. A country's fiat currency moving as wildly as Friday will undoubtedly fuel the debate over the role of program trading in the foreign exchange market.
Prior to this, the flash collapse of the South African rand in January this year and the unexpected depreciation of the New Zealand dollar last year were both believed to be related to programmatic trading. Killen ( ), head of foreign exchange, fixed income and commodities trading at Australia's Westpac Bank, said:
&Such (plummets) are becoming more and more common. The market keeps getting stuck in flash crashes that appear to be caused by algorithmic trading. &r
Bank of America Merrill Lynch strategists Xiao ( ) and Irarov wrote in research reports two days ago that "ghost liquidity" creates the illusion of stability, but in fact the foreign exchange market is fragile But it is increasing day by day.
They said that while the bid-ask spread of traditional liquidity indicators has narrowed, an indicator measuring the impact of the trading market has increased by % since this year, that is, the frequency and level of "extremely large volatility events".
After the results of the British "Brexit" referendum came out in March, the pound plummeted by % that day, a drop even greater than today. However, traders believe that this plunge is even more shocking. Not only did Friday’s incident occur in just two minutes, but no one expected the plunge. This reminded some traders of the market's reaction after the Swiss National Bank suddenly decided to abandon the Swiss franc's cap on the euro in 2018, and the Swiss franc plummeted by about %.
Simpson, a senior market analyst in Singapore, said that this is the largest fluctuation of the pound since "Brexit", but compared with "Brexit", this plunge is more severe. He said that the trading volume of sterling is usually not large in early Asian trading, and it was especially small this Friday because the market lacked news to stimulate the market and was waiting for the U.S. monthly non-farm payrolls report. Some traders pointed to the accumulation of large GBP/USD positions in the over-the-counter options market, which could also worsen the pound's performance.
A spokesman for the Bank of England said it was looking for the cause of the pound's plunge. Ashkar is head of capital markets products at C, which provides infrastructure for electronic traders. He believes it is still too early to draw conclusions about the role algorithmic trading played in Friday's plunge in sterling. He said that many previous market fluctuations were initially thought to be caused by algorithmic trading, but were eventually found to be caused by human error or other reasons.
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