Brexit Crash of 2016: Analysing Algorithmic Trading's Impact on the Pound Sterling

By:- Yash Sharma

The Brexit referendum, which took place on June 23, 2016, had a significant impact on the value of the British pound sterling (GBP). Algorithmic trading, also known as automated or high-frequency trading, playedaroleinamplifyingthevolatilityand speed of market movements during this period.

computer programs to execute trades based on predefined rules and algorithms. DuringtheBrexitperiod,variousautomated trading strategies were employed by market participants to take advantage of short-term market movements. These strategies included trend following, momentum trading, and statistical arbitrage.

3.LiquidityandMarketDepth:

Algorithmic trading can enhance liquidity and market depth by providing continuous buying and selling pressure. However, duringtimesofextrememarketstress,such as the Brexit referendum, liquidity can dry up as algorithmic traders rapidly adjust their positions or exit the market. This can exacerbate price movements and lead to moresignificantpriceslippage.

4.FlashCrashofOctober7,2016:

How Algorithm Trading’s Impacts poundsterling?

1.VolatilityandMarketReaction:

The announcement of the Brexit referendum and subsequent campaigning created uncertainty in financial markets. As the referendumdate approached, polls and political developments began influencing market sentiment, leading to increased volatility in currency markets, including the GBP.

2.AutomatedTradingStrategies:Algorithmic tradingrelieson

One notable event that highlighted the impact of algorithmic trading on the GBP was the "flash crash" that occurred on October 7, 2016. During Asian trading hours, the pound experienced a rapid and significant decline against the US dollar within a short period of time. While the exact cause of the flash crash is still debated, algorithmic trading, particularly stop-loss orders triggering automated selloffs,isbelievedtohaveplayedarole.

5.RoleofNewsandSentimentAnalysis:

Algorithmic trading systems often incorporatenewsand sentiment analysisto make trading decisions. During the Brexit period, news releases, opinion polls, and political developments had a significant impact on market sentiment. Algorithmic trading systems could react to this news in real-time, amplifying market movements andexacerbatingvolatility. one hand, it made UK exports more competitive,benefitingsomeindustriesand boosting exports. On the other hand, it increased the cost of imported goods, which contributed to inflationary pressures andimpactedconsumerpurchasingpower.

Effect of Brexit crash on pound sterling

The Brexit referendum and the subsequent market reactions had a significant impact on the value of the pound sterling (GBP). HerearesomeeffectsoftheBrexitcrashon thepoundsterling:

1.ImmediateDepreciation: The immediate aftermath of the Brexit referendum saw a sharpdepreciationofthepoundsterling.As the outcome of the referendum signalled the UK's decision to leave the European Union, market uncertainty and concerns about the economic consequences led to a sell-off of the pound. The GBP experienced a substantial decline against major currencies, including the US dollar and the euro.

2. Volatility: The Brexit crash introduced increased volatility into the currency markets, particularlyforthepoundsterling. Uncertainty regarding the future relationshipbetweentheUKandtheEU,as well as the potential impact on trade, investment,andtheoveralleconomy,ledto significant swings in the value of the GBP. Volatility persisted throughout the negotiation period and subsequent developmentsintheBrexitprocess

3. Economic Impact: The depreciation of the pound sterling had both positive and negative effects on the UK economy. On

4.InvestorConfidence: TheBrexitcrashand the uncertainty surrounding the negotiations and future trade agreements affected investor confidence in the UK. Foreign investors, concerned about the potential disruption to trade and access to the EU market, may have reduced their investments in the UK. This could have implications for foreign direct investment, business expansion, and overall economic growth.

5. Policy Responses: In response to the Brexitcrashandtheeconomicuncertainties it created, the Bank of England implemented monetary policy measures to stabilise the economy. These measures included interest rate adjustments and quantitativeeasingprograms.Theobjective was to provide support to the economy, manageinflation,andstimulategrowth.

6. Long-Term Outlook: The impact of the Brexit crash on the pound sterling is ongoing and will depend on the outcomes of the Brexit negotiations, trade agreements, and the overall economic performanceoftheUK.

The pound's value may continue to be influenced by market sentiment, economic indicators, and developments in the relationship between the UK and the EU. It isworthnotingthattheimpactoftheBrexit crash on the pound sterling is a complex and evolving situation, and the effects can vary across different sectors of the economy.