Federal regulators warned in a recent report against the risks computerized stock trading may imply in an increasingly volatile market, regulatory measures on clearing houses, and a series of other issues.
According to the report released Tuesday, modern technologies and a shift in the role of banks as main providers of liquidity on stock markets may reshape the financial markets by exposing them to new threats.
The Financial Stability Oversight Council, which issued the report, also cautioned against clear houses’ practices that threaten futures exchanges’ stability.
This latest report is the fifth since the FSOC was first established in July 2010. But it is the first time the council questions the role of central players in designing vulnerabilities and reshaping financial markets.
Federal Reserve head Janet Yellen, who is part of the FSOC, said that there was more to do in detecting “new risks”, although the report expresses optimism on the resiliency of U.S. exchanges.
Ms. Yellen also pointed out that market participants are increasingly worried about a looming liquidity crisis caused by computerized trading and new regulations that discourage banks from pumping money into the markets.
By the end of the month, the FSOC will publish a report on a rare volatility of Treasury markets recorded in the last seven months.
The council also deemed rapid-fire trading a “destabilizing factor” especially if it influenced prices when the market was most vulnerable.
Yet, the report failed to provide solutions to the issues it had underlined. Instead it recommended lawmakers to take additional steps and gather more data.
Treasury Secretary Jacob Lew, who heads the FSOC, called for increased vigilance among regulators on potential threats to market and its level of liquidity.
The council also brought into discussion the role of large networks of clearing houses such as Intercontinental Exchange Inc. Such entities are middlemen between two participants in a transaction and make sure that each party meets their obligations.
Although the FSOC lauded the role of clearing houses in assuring the market’s stability and transparency, it expressed its concerns that the downfall of these entities may trigger a series of negative consequences on the entire financial sector.
Treasury Secretary recommends regulators to assess the threats computerized trading may involve and find a plan B if clearing house networks collapse.
Moreover, the heads of The Federal Reserve and the Commodity Futures Trading Commission announced that they would try to issue new rules on clearing houses. Yet, those entities claim they are already struggling with tight regulations, so there is nothing more to fix.
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