5  For example, O’Hara (2004). 4  BIS central bankers’ speeches  Frictions in pricing arise from the process of matching buyers and sellers. Here, the role of market-makers is key. The market-maker faces two types of problem. One is an inventorymanagement problem – how much stock to hold and at what price to buy and sell. The market-maker earns a bid-ask spread in return for solving this problem since they bear the risk that their inventory loses value. 6 Market-makers face a second, information-management problem. This arises from the possibility of trading with someone better informed about true prices than themselves – an adverse selection risk. Again, the market-maker earns a bid-ask spread to protect against this informational risk. 7 The bid-ask spread, then, is the market-makers’ insurance premium. It provides protection against risks from a depreciating or mis-priced inventory. As such, it also proxies the “liquidity” of the market – that is, its ability to absorb buy and sell orders and execute them without an impact on price. A wider bid-ask spread implies greater risk in the sense of the market’s ability to absorb volume without affecting prices. This basic framework can be used to assess the impact of the changing trading topology on systemic risk, moving from analysing market microstructure to market macrostructure. Take the effects of fragmentation. That heightens competition among trading platforms, offering differing execution options and wider access to participants. This would tend to attract liquidity providers, including cross-market arbitraging HFT.
Christian Noyer: Monetary policy and the crisis – some lessons for the future Keynote address by Mr Christian Noyer, Governor of the Bank of France, at the ParisEuroplace Financial Forum, Tokyo, 16 November 2009. *  *  *  Central banks have been very active over the last two years in containing the impact of the financial crisis. Monetary policy has made an important contribution to stabilizing financial markets and the real economy. Today, however, I will not talk about our response to the crisis, whether by conventional or unconventional measures. I will rather focus on the longer term and address two questions: "Was monetary policy the cause of the crisis?" and "How can it contribute to preventing future crisis?" These are two different questions. And they call for differentiated answers. While I doubt very much that monetary policy played a major role in triggering the crisis, I also believe that it can – and should – help in the future to better contribute to financial stability. Was monetary policy the cause of the crisis? One major success in the two last decades has been the achievement of price stability in most industrialized and many emerging economies. This success has rightly been ascribed to the monetary policy framework almost universally adopted in the world, which, beyond national differences and specific features, is based on two common pillars: Central bank independence and price stability as a primary objective.