Importantly, some PTF firms have been able to make markets at lower marginal cost than other participants, including by closing positions or offsetting risk in correlated instruments in shorter time frames. These competitive pressures have been one factor prompting many banks to warehouse less risk in fast markets, changing their business model to act as agents who sit between end-users and PTFs and the 1  remaining, typically large, bank market-makers. To differing degrees across markets, regulation has also played a role in encouraging such activity. In US equity markets, for example, Regulation National Markets System (2005) required brokers to execute client orders at the best price offered electronically on any venue, leading to fleeting arbitrage opportunities for the fastest moving market participants. In Europe in 2007, MiFID laid the groundwork for more competition, leading to different types of trading venues and more market fragmentation, also contributing to the growth of 2  high-frequency trading. And this regulatory influence will continue, with MiFID II set to introduce a whole host of new rules which bear on fast markets. As Governor Carney has often stressed, central banks care deeply about the operation of financial markets. 3  For the purposes of this speech, I will examine the implications of these developments through two prisms: market efficiency and market resilience. 1  See BIS (2016), ‘Downsized FX markets: Causes and Implications’. The Markets in Financial Instruments Directive (MiFID) was introduced in Europe in November 2007. It increased competition between traditional stock exchanges and alternative trading venues.
Jan. 14  Jul. Jan.  Jul. 15  Sources: Bloomberg and Bank calculations. (a) Average across the 50 largest equity and fixed income ETFs globally by assets. 13  All speeches are available online at www.bankofengland.co.uk/speeches  13