(Bloomberg) -- Financial markets have become more susceptible to liquidity shortages with the rise of algorithmic trading and increased market fragmentation, according to the Bank for International Settlements.
The institution analyzed 25 years worth of high-frequency trading data across asset classes in the US, Europe and Japan and concluded that markets have become more fragile even as liquidity on average improved.
The BIS said sudden bursts of wild price swings and flash crash events are more frequent now, and the main reasons for that are the advance of electronic trading and the increased market fragmentation. Equities in particular have become more splintered, as evidenced by traditional exchanges significantly losing market share, the researchers said.
“Market participants are navigating a sea that is often much calmer than in the past but one that is also increasingly prone to sudden and significant storms,” the BIS said in a working paper published on Friday.
Broad economic and geopolitical events also contributed to episodes of illiquidity, during which traders face abnormally high execution costs, the BIS said.
Researchers also found equity and government bond markets were particularly vulnerable to liquidity shortages. Foreign-exchange trading, meanwhile, proved more resilient potentially due to measures taken to curb unwanted behavior from high-frequency traders.
©2024 Bloomberg L.P.