Overnight there was a “flash crash” that saw sterling endure one of the steepest falls in its history.
As not all of us are well-versed in stock market lingo, here is everything you need to know about what actually happened and what it all means.
What is a “flash crash”?
Putting it simply, a “flash crash” is a very rapid and extreme fall in the value of a currency in a particularly short period of time.
What actually happened?
During the Asian trading session (so overnight for us in the UK), sterling plunged by as much as 6% against the dollar in just two minutes. The pound fell to 1.18 dollars in a matter of minutes, hitting fresh 31-year lows before recovering to 1.24.
The British currency, which would buy around 1.26 dollars on Thursday, plunged past the 1.20-dollar level early on Friday before recovering minutes later and trading around 1.24 dollars.
Foreign exchange “traders will have woken up this morning stunned”, said Margaret Yang of CMC Markets in Singapore.
Experts are blaming algorithmic trading computers, but what is algorithmic trading?
Algorithmic trading, sometimes referred to as algo-trading, involves programming computers to follow a set pattern of instructions when placing trades at lightning fast speeds, quicker than any human trader could. They aims to maximise profits at the fastest pace possible.
The instructions are based on numerous factors, including time, price and advanced mathematics. However, some algo platforms also trade on the back of news sites, and even react to social media sites such as Twitter.
Why might algos have triggered sterling’s overnight crash?
A series of announcements from the Conservative Party indicating that the UK is headed for a “hard Brexit” (where the country would quit the single market and its economic benefits, but reduce immigration) has spooked currency traders all week.
Comments made by French president Francois Hollande, who insisted the European Union must take a tough stance in negotiating Brexit, also can’t have helped the situation.
So what’s next for the battered currency?
As algo trading becomes more popular and cost-efficient and Brexit creates more and more uncertainty and negative headlines, another flash crash could well be on the cards.
The Bank of England has said it is “looking into the cause of the sharp fall”, so we will wait to see what they make of the “flash crash”.
Kathleen Brooks, research director at spreadbetter City Index, says: “Unlike the flash crash that impacted the Dow Jones in 2013 and which triggered an investigation by the US authorities, the foreign exchange market is not regulated in the same way, so there is unlikely to be an investigation and we may never know what actually happened last night.”