Global markets will only get more volatile and put UK lending at risk, Bank of England warns

The stock market turmoil that followed Black Monday could become a common occurence, with serious implications for bank lending in the UK

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Modern technology and mathematical formulas mean dealers can execute split-second trades at higher volumes than ever before. But the downside to this is that when everyone uses similar algorithms, it results in a market with only buyers or only sellers, causing prices to swing violently, according to the Bank of England.

This means that episodes such as the chaos that followed ‘Black Monday’ in August – when hundreds of billions of pounds were wiped off global markets after China devalued its currency – could become a regular occurrence.

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The Bank’s Financial Policy Committee, which is probing the matter, has found that since the financial crisis stock markets have become much more sensitive and prone to extreme swings.

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These banks can no longer be relied on to act as a stabilising influence on markets – as was the case before the financial crisis – because tighter rules on risk-taking means they’re not allowed to hold large inventories of stocks, bonds and derivatives, which had previously helped to keep prices stable, the FPC said.

Full article: Global markets will only get more volatile and put UK lending at risk, Bank of England warns (The Telegraph)