Central banks adapting to high-speed markets, BIS report finds

Central banks are adapting to “major developments” in markets, as trading speeds up and access to data comes to define competitive advantage, a new report finds.

The work by the Bank for International Settlements’ Markets Committee is designed to help central banks cope with the rise of what the authors call “fast-paced electronic markets”, or FPMs.

The report finds trading is increasingly fragmented across venues, with much faster information flows; that liquidity provision has become concentrated in a handful of large banks; and electrification has led to the “commoditisation” of large quantities of high-frequency data.

Central banks are caught up directly in such developments, both in their market operations for implementing monetary policy and their reserves management.

Developments may have made monitoring markets more challenging due to the higher speed and quantity of data, the rapidity of market moves, and the greater cost associated with market data becoming a highly prized commodity. But the report finds many central banks have been adapting successfully.

“Central banks have made significant advances in their monitoring of fast-paced markets and will continue to adapt their approaches to market monitoring as necessary to fulfil their mandates,” says Jacqueline Loh, chair of the Markets Committee.

The changes facing central banks encompass the need to work with a wider range of counterparties, collect additional data, and begin using new tools and technologies.

Central banks have made significant advances in their monitoring of fast-paced markets and will continue to adapt their approaches to market monitoring as necessary to fulfil their mandates

Jacqueline Loh, Markets Committee

The report identifies a trend among central banks of making greater use of high-frequency, transaction-level data for their market monitoring. Institutions have focused on staying abreast of “near-time” developments, such as intraday shifts in market liquidity, and understanding the medium-term changes in market structure.

In a survey conducted by the Markets Committee, more than 80% of central banks report monitoring FPMs for the “core purposes” of market intelligence, reserves management and implementing exchange rate policy. Closer to 60% monitor on the basis of financial stability or monetary policy implementation.

Non-bank issue

The report identifies a further issue for central banks in coping with the proliferation of non-bank players; a process that developed rapidly over the past decade. Some estimates imply such firms, which tend to focused on fast algorithmic-trading strategies, account for 50% of trading in both US equities and on-the-run US Treasuries.

As well as having a potential impact on “market quality”, the growth of such firms makes monitoring structural changes and “ex post event analysis” harder.

“The emergence of new entrants in key roles means it is incumbent on the official sector to engage with and understand the impact of these participants,” the report says.

The research was led by the Banque de France’s Imène Rahmouni-Rousseau and the Bank of England’s Rohan Churm.