Technological advances in equity markets entered the spotlight following the Flash Crash of May 2010. This column analyses the advantages and disadvantages of algorithmic and high-frequency trading. Ever-faster exchanges do not always improve liquidity. Following a speed upgrade in the Nordic equity markets, effective spreads posted by high-frequency traders increased by 32%.
Xavier Vives, 12 August 2010
CEPR Policy Insight 50 models the trade-off between competition and stability in the banking sector. Competition might increase instability through two channels: by exacerbating the coordination problem of depositors/investors on the liability side and fostering panics; and by increasing incentives to take risk, and thus the raising probability of failure. Regulation can alleviate this competition-stability trade-off, but the design of optimal regulation has to take into account the intensity of competition.
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