Monitoring of fast-paced electronic markets

Report submitted by a Study Group established by the Markets Committee and chaired by Imène Rahmouni-Rousseau (Bank of France) and Rohan Churm (Bank of England).

Foreign exchange and other fast-paced electronic markets (FPMs) have undergone a wide range of structural changes in recent years. Trading in FPMs has become increasingly electronic and automated, significantly changing the market ecosystem. Against this background, the report explores aspects of structural change with immediate relevance for central banks' market monitoring approaches. 

The three key structural changes include greater speed and fragmentation of trading activity; greater concentration of liquidity provision among the largest banks and the new set of non-bank intermediaries; and the rise in volume and commoditisation of large quantities of high-frequency data on the back of greater electronification. 

At the same time, the market-monitoring capacities of market participants in both the public and private sector have been transformed. Central banks have striven to adapt their near-time and medium-term monitoring approaches to these changes. Monitoring needs naturally vary according to central bank mandates and how far markets have been electronified. Central banks' monitoring requirements will also naturally differ from those of the private sector.

JEL classification: C80, F31, G14, G15

Keywords: electronic trading, market monitoring, foreign exchange, flash events, market functioning