Trading in foreign exchange and other fast-paced electronic markets is increasingly spread across a range of platforms, with non-bank intermediaries, most notably principal trading firms, gaining a stronger foothold. In addition, access to data and data-centric technologies increasingly defines competitive and market structure changes.
The Bank for International Settlement (BIS) recently issued a report analyzing the major developments in the evolution of market structure and their implications for central banks. Market monitoring is a core part of central bank activities for operational purposes and to help fulfil their financial stability mandates.
The report highlights three key structural trends:
- Trading is increasingly fragmented across a range of new venues, while the frequency of activity and speed of information flows have accelerated significantly, especially in foreign exchange markets.
- Liquidity provision has become more concentrated among the largest banks, as smaller players resort to an agency model of market-making or exit the business altogether. At the same time, a new set of non-bank intermediaries, most notably principal trading firms, have strengthened their positions.
- Greater electronification has led to the commoditisation of large quantities of high-frequency data.
As many central banks participate actively in fast-paced electronic markets (for example, when implementing monetary policy) they are adapting their approaches to market monitoring. This includes the range of participants with whom they engage, the types of data collected, and the tools and technologies used.
The report points to an overall trend among central banks towards greater usage of high-frequency, transaction-level data. Monitoring market conditions in near time using such data can support monetary policy implementation and foreign exchange reserves management. Over the long term, such monitoring can serve financial stability purposes, for example, by allowing a better understanding of structural trends or aiding the analysis of specific events such as recent “flash crashes”.