Financial markets should brace themselves for repeat performances of the “short, sharp shocks” that have sent asset prices fluctuatingly wildly in recent months, according to a policymaker at the Bank of England.
Chris Salmon, the Bank’s executive director for markets, also warned yesterday that markets may not have been fully tested for their ability to sustain huge short-term swings in equities, currencies, bonds and other investment classes.
When the next bout of “extreme volatility” comes along, particularly if it is accompanied by a seizure in trading, there is a danger that it could be far longer before conditions bounce back to normality, he said.
He referred to two extreme trading days during the past six months when volatility rocketed, but at the same time markets became “incredibly illiquid” and tiny amounts of trading hugely moved prices. In October, unexpectedly weak retail sales figures in the United States triggered a “flash crash” in yields on American government bonds. The 0.37 per cent drop in returns available on ten-year US government bonds was eight times higher than the normally expected movement. Similarly, in January, the Swiss franc surged in value, at one point by 30 per cent, after the central bank scrapped the cap on its trading level against the euro.
In both cases, prices and liquidity subsequently recovered quickly, Mr Salmon said, though he warned that this might not always happen in future.