Federal Reserve Governor Lael Brainard on Wednesday issued a general call for more research on the impact of the computerization of Wall Street.
Speaking at a forum on global finance in Austria, Brainard said the “possible effect of [high-frequency trading] on the resilience of market liquidity is an important topic for future research.”
She commented that “markets increasingly dominated by HFTs may be less able to absorb large shocks…when demand for liquidity is significantly above the norm.”
Part of the reason for that, Brainard noted, could be attributed to hypotheses about the effect of HFT on incentives to compete.
“It is also possible that markets that more readily lend themselves to high-speed trading may be characterized by relatively greater concentration over time,” she said, from Salzburg.
“Achieving the speed necessary for high-frequency trading requires large technology investments that necessarily may support a relatively more limited number of market participants,” Brainard explained. “Greater concentration in turn might be associated with lower resilience at times of stress.”
The Fed Governor spoke more broadly about the “resilience of market liquidity,” and noted that the central bank is “in the early stages” of completing a research on the issue. In addition to HFT, she said that banks’ post-crisis and post-Dodd-Frank behavior could be hindering liquidity.
She claimed, however, that “there is relatively little evidence of any deterioration in day-to-day liquidity” and called empirical proof purporting to show increasing illiquidity as “not particularly robust.”
Anecdotal examples she cited included a day last October when “movement in Treasury prices was six standard deviations above the mean.”
“In addition,” she noted, “after 4 p.m. on March 18 EDT of this year, a meeting day for the Federal Open Market Committee, the U.S. dollar depreciated against the euro by 1.75 percent in less than three minutes, an unusually large drop in such a short interval.”
