The Bank of England is taking a deeper look at whether some investment strategies and computerised trading are increasing volatility in markets and putting further strain on already fragile liquidity.
The Bank’s Financial Policy Committee (FPC), which monitors the financial system for potentially destabilising risks, said “disorderly” swings in markets, such as those on the New York Stock Exchange in August, have so far been short-lived and without systemic consequences.
“However, there is evidence that disorderly conditions in one market can spill over to others,” the FPC said.
The committee includes top officials from Britain’s financial regulators who have powers to intervene in Britain’s financial markets.
The meeting discussed provisional findings of a BoE study into why liquidity, or the ability of investors to buy and sell assets easily, has become fragile and if it harms funding for the econ- omy.
The FPC said it wants more information and noted that the use of computers in trading was a common feature in recent episodes of volatility.
There was evidence that turnover in corporate bond markets has fallen, and the committee asked for an updated assessment of changes in dealers’ ability to provide a market in debt.