(Reuters) – The Bank of England told markets on Friday to "take heed" as the "short sharp shocks" seen in markets over recent months could happen more frequently.<\/p>\n
Chris Salmon, the Bank’s executive director for markets, said two incidents have highlighted how volatility can suddenly increase and liquidity drop.<\/p>\n
In October last year, concerns about the global economy triggered a "flash crash" in U.S. Treasury yields, and in January this year there was a sharp rise in the Swiss franc after it was unpegged from the euro.<\/p>\n
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, Salmon said.<\/p>\n
"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," Salmon said in a speech in London.<\/p>\n
"And that is why it is only fit and proper for me to finish on a cautionary note: market participants take heed."<\/p>\n
He said the spikes in volatility in recent months have coincided with periods of much impaired market liquidity.<\/p>\n
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 (FICC) markets.<\/p>\n
"There must be a risk that future shocks could have more persistent and more widespread impacts across financial markets than has been the case in the recent past," Salmon said.<\/p>\n
Markets should not see it as an "aspiration" to return to the "under-priced" liquidity seen before the 2007-09 financial crisis.<\/p>\n
Recent periods of financial market volatility also suggest that there are reasons to be cautious about liquidity in core financial markets, he said.<\/p>\n
The structure of the market has changed as market-makers say they have become more reluctant to commit capital to holding stocks of assets, which in turn has led to increased concentration in some markets.<\/p>\n
Electronic platforms are also increasingly being used in FICC markets, which could be contributing to discontinuous pricing in periods of stress, Salmon said.<\/p>\n
source:www.uk.reuters.com<\/p>\n","protected":false},"excerpt":{"rendered":"
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