On October 7th 2016 the GBP suffered a minor aneurysm and dropped like a stone for a short period of time as seen below.
The Bank of International Settlements had just released a report into possible reasons for the crash. You can download the full report here. The executive summary outlines a constellation of reasons for the crash –
A number of factors are likely to have contributed to and amplified this market dysfunction. In particular, significant demand to sell sterling to hedge options positions as the currency depreciated appears to have played an important role. The execution of stop-loss orders and the closing-out of positions as the currency traded through key levels may also have had an impact. A media report released shortly after the move began, which would have been interpreted as somewhat sterling-negative, is only likely to have added marginal weight to the move as it did not contain new information. These factors appear to have contributed to the mechanical cessation of trading on the futures exchange and the exhaustion of the limited liquidity on the
primary spot FX trading platform, which encouraged further withdrawal of liquidity by providers reliant on data from those venues.
The presence, outside the currency’s core time zone, of staff less experienced in trading sterling, with lower risk limits and risk appetite, and with less expertise in the suitability of particular algorithms for the prevailing market conditions, appears to have further amplified the movement. Other factors such as ‘fat finger’ errors and potential market abuse cannot be ruled out, but there are little, if any, hard data to substantiate them.
The report is actually an interesting read if only from the perspective of educating traders as to how liquidity can slip even in a market as large as FX due to changing time zones.. The data below gives an interesting insight into how you can have a period of high trading activity combined with relatively low liquidity as markets shift time zones.