This one may be no exception. In the trading sphere, there is a risk the individually optimising actions of participants generate an outcome for the system which benefits no-one – a latter-day “tragedy of the commons”. 25 How so? Because speed increases the risk of feasts and famines in market liquidity. HFT contribute to the feast through lower bid-ask spreads. But they also contribute to the famine if their liquidity provision is fickle in situations of stress. In these situations, backstops sources of longer-term liquidity ought to ride to the rescue. But HFT has also affected this outside option. LFT market-making has been squeezed-out by competitive pressures from HFT. And those LFT market makers that remain are at an acute informational disadvantage in situations of stress. The result is a potentially double liquidity void. (c)  Behaviour across assets and markets  So far the story has been confined to behaviour of one stock trading on a single exchange. But the changing structure of markets and trading mean it is unlikely that any stock-specific price dislocation will be localised. The new topology of trading makes contagion more of a potential bogeyman now than in the past. One source of contagion is between stock prices and derivatives written on these stocks. HFT activity means that arbitrage opportunities between these markets are likely to be quickly removed. Or, put differently, price dislocations in the cash market are likely to be transmitted instantly to futures markets and vice-versa.
BIS central bankers’ speeches  19  Chart 13: Difference in maximum and minimum price of GE shares across different exchanges on 06 May 2010 Price difference $ 0.40 0.35 0.30 0.25 0.20 0.15 0.10 0.05 0.00 14:41  14:43  14:45 Time  14:47  14:49  Source: NANEX. Notes: Difference in bid prices across NASDAQ, NYSE and Pacific Exchange. Table 1: Round-trip latencies for selected exchanges, April 2010 Exchange  Average round-trip latency (microseconds)  Nasdaq OMX INET  250  Bats Europe  270  Chi-X Europe  400  NYSE Arca  900  LSE Tradelect  2000  TSE Assowhead  5000  Source: http://mondivisione.com via AFM 2010. 20  BIS central bankers’ speeches