GBP/USD and GBP/JPY Suffers Flash Crash
A flash crash can happen at any time and causes HUGE movement in the market affected. For example, on May 6, 2010, the Dow Jones fell over 1000 points. A flash crash on the Singapore Exchange wiped out $6.9 billion in capitalization resulted in new regulations to curb excessive speculation and price manipulation. The cause of the British Pound flash crash has been attributed to comments made by the French President Francois Hollande (basically calling for tough Brexit negotiations) while others attribute the crash to algorithmic trading. What we definitively know is that the GBP/USD fell over 800 pips and the GBP/JPY fell over 600 pips in one 15 minute bar at 7:15 pm New York time.
GBPUSD 15 Minute Chart
GBP/JPY 15 Minute Chart
While this isn’t the first time a flash crash happened, it does highlight the exposure that forex and futures traders have to contend with. In this case, the pip spread for entering or exiting a trade on either of these two markets went to over 150 pips or about $1500 for entering or exiting a trade. It also highlights why the binary options are so much safer for trading today’s markets.
While forex traders were being stopped out just over the cost of trading (pip spread) with substantial losses, binary option traders were safe because they paid their risk on entry. They could never lose more than they paid when they entered their trade. For example, if a trader had entered a long position on the GBP/USD at 7 pm New York time (15 minutes before the flash crash) using an ATM binary, his risk would have been approximately $50 (excluding the exchange fee of $1.80 round-trip if trading less than 10 contracts or $18 if trading 10 contracts or more). The maximum loss for the binary option would have been $50 – regardless of how many pips the GBP/USD fell.
The bottom line — with flash crashes occurring more frequently in today’s markets, binary options are the only alternative for traders wanting to limit their risk on entry.