That evaporation appears to have played a key role in propagating stress during the Flash Crash.24  19  “Latency” refers to the time it takes from sending an order to it being executed. 20  Haldane (2011b), Mackenzie (2011). 21  Menkveld (2012). 22  Angel et al (2010). 23  Egginton et al (2012). 24  CFTC-SEC (2010). BIS central bankers’ speeches  5  So too did message traffic congestion. One side-effect was to slow-down price discovery across exchanges. Many traders firms found themselves observing stale prices. As a result, identical stocks traded at different prices across exchanges (Chart 5). In principle, this represented an arbitrage opportunity. In practice, arbitrage relies on costless trading and, at that time, trades could not have been executed at any price. The Flash Crash was short-lived. Some have argued the lessons have been learned. Yet it appears to have been anything but a flash in the pan. In the period since, researchers have identified a large number of “mini-Flash Crashes”, with temporary dislocations in prices in markets as varied as Japanese yen and cocoa futures.25 As with the Flash Crash, there appears to be no convincing explanation for these gyrations. The uncertainties and externalities associated with the race to zero are one candidate explanation. Liquidity mirages and message traffic congestion are nibbling away at the common good of market stability. The competitive quest for individual speed risks a fragile evolutionary equilibrium.
Andrew G Haldane: Financial arms races Speech by Mr Andrew G Haldane, Executive Director, Financial Stability, Bank of England, at the Institute for New Economic Thinking, Berlin, 14 April 2012. All speeches are available online at www.bankofengland.co.uk/publications/speeches  *  *  *  Elephant seals have got too big for their beaches. A large specimen might weigh over 8000 lbs (3700 kg).1 Their size has a simple evolutionary explanation. Large males fight for the right to mate with a whole beach full of females. For elephant seals it is, quite literally, winner-takes-all. And the key to winning is simple – size. No-one is going to argue with a male swinging around his proboscis on the beach. In that way, size has become the dominant gene in the evolutionary trajectory of the elephant seal. But size is not costless for the elephant seal. It makes them easy prey on land. At times in the past, this has threatened their very existence. In the 18th century, their main land predator – man – hunted elephant seals for their blubber and fur. In the 19th century, their numbers fell rapidly to below 100 and for a time they were believed to be extinct.2 Just in time, governments intervened to place restrictions on hunting, nationally and internationally. Today, elephant seal numbers have swelled to above 800,000. The hand of government has protected them from man – and from themselves.