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Cable capitulation!

GBPUSD drops 800 pips:

Wow! What happened? This morning at 00:07 UK time GBPUSD was trading at 1.2601. Over the next few seconds the 1.2600 level broke and mass selling kicked in. Sell orders triggered sell orders. Algorithms perhaps?  The loop continued. GBPUSD dropped fast… really fast!  “One-twenty-five figure [1.2500 GBPUSD] just got taken out!” shouts one of the Dealers here on London’s 24hr trading floor at LCG.  “More selling coming in! One-twenty-four… three… one.   Straight through ONE-TWENTY!!! ”   Within minutes GBPUSD printed 1.1800, very ouch!  “Everyone chill-out, take a step back, breeeeath.  Okay what’s the damage?  800 pip drop!  Oh dear! [actually another word was used]”  Then reality kicked in.  GBPUSD started to rally. Over the next 10mins we saw a retracement to 1.2350… calm returned.

So what caused the initial sell off? We don’t know for sure. But theories are a fat finger (the term used for a trader pressing the wrong button when executing an order) or algorithms. 

Why did it drop so much? Algorithms (“algos” for short) are designed to act without emotion or thinking based on specific rules written by coders. E.g. “If GBPUSD drops more than 10 pips in under a second then sell £1M.” The problem is these algos often trigger other algos which trigger more algos, and so on. These algos react seriously fast. Within a few milliseconds or even microseconds. A human doesn’t have time to intervene to stop it. By the time you’ve blinked (300 milliseconds) the algo has sold, reloaded and sold again… 20 times! Now you’ve seen it, thought about it and reacted another second has passed. In this time 500 more algos have triggered, each jumping on the bandwagon and selling more.

Back to GBPUSD… currently at 1.2380 (at time of writing this). Is this the bottom? Remember in Wednesdays article I told you the 1985 low was 1.0520. Well it’s getting closer, fast. Has GBP dropped too much in only a week?