The pound plummets against the dollar in apparent ‘fat-fingered’ trade: “I doubted what I saw on my screen”

The British pound saw a dramatic drop in early-morning Asian trading today, falling more than 6% to a 31-year low just after 7a.m. Hong Kong time to as low as $1.18 from just above $1.26. The British currency recovered to about $1.24 after the sharp drop in value early in the day.

“I initially doubted what I saw on my screen,” said Kenji Yoshii, a foreign exchange strategist at Mizuho Securities, told The Wall Street Journal.

Many tried to pinpoint the cause of the unexpected drop in the pound’s value.

Some pointed to comments made by French President Francois Hollande in Paris, calling for tough exit negotiations with Britain as it initiates its divorce from the European Union. The drop came early in the Asian trading session, where light trading volumes likely exacerbated the move. As the pound’s descent worsened, it broke technical levels that probably triggered automatic sell orders or selling from trading strategies based on algorithms, traders said.

pound-to-usd-oct-7

Source: Bloomberg. Pound to US Dollar

Brexit, traders pound down pound

The pound is now down more than 16% since the U.K. voted to leave the E.U. on June 23. Earlier this week, British Prime Minister Theresa May set a date to start the process of leaving the union, and suggested controlling immigration was more important than maintaining full access to the open market.

While some thought the drop might have been cause by automated trades picking up on the tensions between the U.K. and the European Union, some felt it was more likely that there was an intentional decision made while markets where thin.

“A sudden move in a very quiet time not linked to any information is highly unlikely to be due to any algorithm,” said Lyle Pakula, chief investment officer of Melbourne-based hedge fund AE Capital, which uses automated computer programs to make trading decisions. “In my opinion, the source of the run is likely due to a discretionary trader trying to push the market.”

The most likely cause of the pound’s sudden drop on Friday was a so-called “fat finger” trade—that is, an error by a trader—or a rogue algorithm, said Bart Wakabayashi, managing director and head of Hong Kong foreign exchange sales at State Street Global Markets.

“When you have that big a move you’re triggering a lot of things on the way down, like stop losses and options barriers, which exacerbate the whole move,” said Wakabayashi, who added he expected the pound would head back up toward its starting level on Friday in the near-term.


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