What caused the pound to plunge?

A rapid descent in the pound against the dollar Friday, referred to as a “flash crash”, set tongues wagging across global trading floors as to what triggered the rare event.

After the pound crashed more than six percent against the dollar in under ten minutes during Asian trading hours, various explanations have been given for the cause in the absence of an official reason.

A spokesman for the Bank of England said simply that it was “looking into what happened” after sterling crashed also to a 6.5-year low versus the euro.

“The cause of the crash in the pound is still unknown, with a number of factors probably at play including a fat finger trade, very low liquidity, a large number of stops being triggered and algorithms exacerbating the move,” said Craig Erlam, senior market analyst at Oanda trading group.

Traders think that in today’s tech-dominated world, it probably had a lot to do with complex mathematical equations known as algorithms, although a monumental human error, the proverbial fat finger, has not been ruled out.

Automated trading systems can be set up to keep an eye on news headlines and react to potentially market-moving information.

Computers also allow for stop-loss orders, or automatic requests to buy or sell an asset once it reaches a certain price level.

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