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Liquidity Illusion Burns Traders Blindsided by Pound’s Crash

  • BofA warns ‘phantom liquidity’ vanishing in times of stress
  • Sterling tumbled 6.1% in a matter of minutes on Oct. 7
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Pound, Liquidity Shake Up Foreign Exchange Markets

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The inexplicable volatility that roiled the British pound last week came as no surprise to Bank of America Corp., which just days earlier warned that liquidity in the $5.1 trillion-per-day global currency market was far worse than anyone imagined.

Sterling sank 6.1 percent in a span of minutes in early Asian trading Oct. 7, following at least three other bouts of puzzling foreign-exchange turbulence in the past two years. The latest episode involved the fourth-most-traded currency, serving up a stark reminder of the pitfalls that investors face in the world’s biggest financial market as banks -- the traditional middlemen -- step back amid post-crisis regulations.