By Helen Allen of the Bank’s Market Infrastructure Division and John Hawkins of the Bank for International Settlements.
Electronic trading is a force for change across markets, enabling a greater variety of trading arrangements, which in turn can affect the performance of markets and welfare more generally. This article first considers why the extent and speed of adoption of new trading systems has been very different between markets. It then focuses on two important issues raised by recent developments. One is the degree of fragmentation or consolidation of trading arrangements, where it is argued that electronic trading can facilitate either effect. The other is the degree of transparency of trading information, where the hugely expanded possibilities that electronic trading offers highlight the choices in this controversial topic. Policy-makers are interested in the wider impact of changes to trading arrangements on the broader economic and financial system. But policy judgments need to be made carefully because the effects can be market specific, uncertain or even counter-intuitive. Moreover, problems arising in market arrangements may prove short term or self-correcting. These considerations all bear on the judgments on whether or how to intervene to address apparent market failures.