Firms specializing in automated trading generally participate in trading venues with “protocols” that allow for highspeed activity, most notably those operating with a Central Limit Order Book (or “CLOB”). CLOBs have long been a fixture of the futures, FX, and equity markets, and allow participating firms to place anonymous orders to buy or sell securities into a standing queue, and to rapidly execute such orders at any given moment in time.7 In the Treasury market, automated trading has become most pronounced in the Treasury futures market and the interdealer market for on-the-run securities, both of which operate with a CLOB protocol. In fact, proprietary automated trading firms are believed to account for over half of the volume transacted over the major interdealer trading platforms. It is helpful to think of two basic types of automated trading strategies: those whose primary purpose is to earn a return by making markets, and those whose primary purpose is to generate excess returns – what market participants sometimes call “alpha-seeking” strategies. A market-making algorithm might be designed to supply liquidity to a CLOB under a set of rules that depend on, for example, historical analysis of market and order book dynamics. An alpha-seeking strategy, on the other hand, might better describe a set of trading practices that is more likely to consume liquidity to produce excess returns. Examples of alpha-seeking strategies might be momentum detection, statistical arbitrage, and spread trading.8 One important difference between most automated trading firms and traditional brokerdealers is their balance sheet properties.
•  A stable value of money combined with sustainable public finances makes an essential contribution to an economic development that is favourable and stable. •  A policy with this direction that is implemented consistently can, with the aid of certain direct cyclical measures, help to stabilise economic activity. As I have chosen to focus today on issues to do with cyclical activity and stabilisation policy, I have not said much about the first of these pillars but that does not imply a value judgement. On the contrary, the reforms of taxation, regulations and so on have presumably played a crucial part in the good development in the 1990s, both in Sweden and elsewhere. At the same time, recent developments bring out some of the problems we now face. Markets are evidently liable to malfunction in the sense that prices deviate markedly from what is reasonable in the long term. Stock markets have provided evidence of this in recent years and it is also very much the case with the krona’s exchange rate. The result can be considerable fluctuations not just in financial markets but in the real economy, too. It is here that I believe the major challenges lie today, both for economic theory and for us more practical decision-makers. I have already discussed the other two pillars. Attempts to raise demand and employment in the short term entail considerable risks, as we saw in the three decades before 1990.