‘Be ready for more shocks in markets’

The Bank of England told markets yesterday to “take heed” as the “short sharp shocks” seen in markets over recent months could happen more frequently.

Chris Salmon, the Bank’s executive director for markets, said two incidents have highlighted how volatility can suddenly increase and liquidity drop.

In October last year, concerns about the global economy triggered a “flash crash” in US Treasury yields, and in January this year there was a sharp rise in the Swiss franc after it was unpegged from the euro.

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In both cases, markets stabilised over the following weeks to avoid spillover contagion to other markets, but this may not be the case every time, Mr Salmon said.

“Financial markets may not have been truly tested for the ability to absorb price moves or flows that persist for a prolonged period, or for a wider spillover between markets,” Mr Salmon added.

“And that is why it is only fit and proper for me to finish on a cautionary note: market participants take heed.”

He said the spikes in volatility in recent months have coincided with periods of much impaired market liquidity.

There were also good reasons to believe that the severity of the two events was accentuated by structural change in the fixed income, commodity and currency markets.