BIS central bankers’ speeches  Chart 9:  Chart 10:  Volatility and correlation of S&P 500  Excess volatility Per cent 20  S&P 500 1Y Correlation 70% 1990 - 2004  Per cent 60  1yr Correltaion (LHS) 15  60%  2005 - 2010  Excess correlation (LHS)  1yr Volatility (RHS)  50% 40%  +  30%  -  40  5 0  30  5  20%  20% 30% 40% S&P 500 1Y volatility  10  15  0% 10%  20  10  10%  0%  50  10  20  50%  0 90 92 94 96 98 00 02 04 06 08  Source: JP Morgan and Bank calculations. Source: JP Morgan and Bank calculations. Chart 11:  Chart 12:  Simulated price series under different Hurst coefficients  Distribution of simulated returns at different time horizons with H=0.9(a)  H=0.5 H=0.7 H=0.9  40  T=1  20 + 0  T=20 T=50  20 40 60 80 100 Time Source: Bank of England. -  +  Source: Bank of England (a) Returns at different time horizons have been scaled by the inverse of the square root of time, 1/sqrt(T).
From this mixed bag, only one clear explanation emerges: that there is no clear explanation. To a first approximation, we remain unsure quite what caused the Flash Crash or whether it could recur. 1 That conclusion sits uneasily on the shoulders. Asset markets rely on accurate pricing of risk. And financial regulation relies on an accurate reading of markets. Whether trading assets or regulating exchanges, ignorance is rarely bliss. It is this uncertainty, rather than the Flash Crash itself, which makes this an issue of potential systemic importance. In many respects, this uncertainty should come as no surprise. Driven by a potent cocktail of technology and regulation, trading in financial markets has evolved dramatically during the course of this century. Platforms for trading equities have proliferated and fragmented. And the speed limit for trading has gone through the roof. Technologists now believe the sky is the limit. This rapidly-changing topology of trading raises some big questions for risk management. There are good reasons, theoretically and empirically, to believe that while this evolution in trading may have brought benefits such as a reduction in transaction costs, it may also have increased abnormalities in the distribution of risk and return in the financial system. Such abnormalities hallmarked the Flash Crash. This paper considers some of the evidence on these abnormalities and their impact on systemic risk. Regulation has thin-sliced trading. And technology has thin-sliced time. Among traders, as among stocks on 6 May, there is a race to zero.