The resulting fragmentation contributed to the growth of highfrequency trading. See CESR (2009), ‘Impact of MiFID on equity secondary markets functioning’, CESR/09-355, and ESMA (2014), ‘High-frequency trading activity in EU equity markets’, Economic Report 1. 3 See Carney, M (2015), ‘Building real markets for the good of the people’. 2  3  All speeches are available online at www.bankofengland.co.uk/speeches  3  Fast markets and market efficiency  There is much evidence that these developments have improved the day-to-day liquidity and efficiency of these markets; that is, the degree to which participants are able to transact in reasonable size in a timely manner, at or close to prevailing prices – giving rise to prices that accurately reflect market participants’ aggregate view of asset values. Empirical research has found that, on average, the presence of high-frequency traders has been associated with improved headline measures of liquidity, at least for trading in small size. There are two reasons why this might be the case. First, as mentioned above, because automated traders are able to achieve low operating costs per transaction, they are able to charge a narrower bid-ask spread as compensation for providing market making services (Chart 6). Second, their speed allows them to update or cancel their (limit) orders quickly as news arrives, meaning their quotes are less likely to be stale when they are executed 4  (Chart 7). There is also evidence to suggest the presence of high frequency trading can improve market efficiency. 5  These are potentially important benefits.
One obvious concern would be if a prime broker or clearing bank was paralysed, including for reasons unconnected to its activity in fast markets – say because of a cyber attack. I think it is fair to say that our understanding of how market functioning would respond in such a scenario – i.e. one in which a number of, in particular high-frequency, liquidity providers were denied market access – remains relatively limited. If there is a common theme across all three of my examples, it is the limits of our understanding. None of the points I have raised with regard to market resilience are wholly new. We at the Bank are following developments in the structure of these markets and their implications for financial stability closely, 19  including through discussions within the Bank’s Financial Policy Committee (FPC). And as regulator both  of many participants in electronic markets and some of those markets themselves, the Financial Conduct 19  See, for example, Shafik, M (2015), ‘Dealing with change: liquidity in evolving market structures’ and the analysis of the sterling flash crash in box 3 of the Financial Stability Review, November 2016 (pages 39-41). 8  All speeches are available online at www.bankofengland.co.uk/speeches  8  Authority (FCA) too has remained deeply engaged and responsive to those developments which fall under its purview. 20  Likewise, in none of these cases have I argued that there is a risk flashing red that requires an immediate response.