Cable Flash

There will be a lot of speculation about what happened to the pound overnight, even after the analysts have given their answers. The difficulty of doing a conclusive analysis is that Forex transactions are not channelled through exchanges like stocks and shares, it is a dispersed market.

Nevertheless, there are a finite number of possibilities, including these:

1. Fat Fingers. Someone put too many zeroes in their order.

2. Algo Frenzy. The machines doing rapid fire selling, because the other machines are doing rapid fire selling.

3. Stop Hunt. People speculating on the pound rising, “the longs”, would have protective stops below the current price to defend against a sudden shock. If all those stops are tripped you get a cascade down.

4. Traders and/or hedge funds running “night raids” on the pound while the Bank of England is literally in bed.  This is similar to the George Soros attack in 1992.  If this is the case it is a perilous time to be in any GBP trading.

Certainly long speculators have had their stops taken out and suffered serious losses. It is possible that someone did this deliberately to clean out the speculators and get a clearer picture of what business thinks of Brexit. Only someone with a lot of money, like a Central Bank, would be capable.

The truth is likely a combination of the above. In the dead of night, a sleepy fat fingers trade or a hedge fund raider launched the Algos into a frenzy and tripped the stops of all the Brexit speculators. A perfect storm, or rather a sort of strange noise in the night that we’ll never really understand.

If that isn’t exiting enough, here are some charts:

Fig 1. on a typical day the pound moves 0.011 in dollar terms. During The Flash, it moved 0.098. In trader terms, we usually move 110 pips per day, here we had 980 pips in 5 minutes. Each bar in the chart shows 15 minutes of trading. This is a very ugly chart.


Fig 2. Compare it with the worst move in recent memory, on Brexit night, 1790 pips over 5 hours, this is how human traders deal with a shock. The Flash is a much sharper move, it looks machine made.


Fig 3. Just to emphasise the extreme nature of The Flash, this chart shows each individual price move, “tick”, as it happened. In the first 26 seconds there are lots of ticks and a 250 pip move. It’s already scary. Between 01:07:16 and 01:08:41 it looks like one huge trade moved 600 pips. That would cost around $6 billion. That goes beyond scary, open mouthed staring happens here. To get another perspective on the size of this Flash, look at the “aftershock” at 01:13:04, that vertical jump is slightly bigger than a normal trading day.


Fig 4. Contrast that with typical price moves at that time of day/night, 24 hours earlier. Look carefully at the price scale, it moved 4 pips during the same period on 6 Oct.

I don’t have enough detail to work out exactly what happened and no information on who did it. Until someone confesses it is unlikely anyone will have concrete answers.

The wider analysis points to a combination of a government happy to let the currency suffer the fallout of their conference posturing and currency traders who persist in trading best case scenarios. To the second group I can recommend Nassim Taleb’s article  explaining how a government with a thin majority can only deliver a hard Brexit and why it will be worse than the worst forecasts.

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