Liquidity provision is affected by changes in market structure, how trades are executed and by competition from outside of the regulatory boundaries that have been established for systemically important financial institutions. The market structure for many asset classes has evolved from a bilateral OTC structure toward a more open, centralized structure through the adoption of electronic trading platforms, post-trade infrastructures and higher degrees of transparency. For example, in the U.S. Treasury market, firms specializing in high-frequency 4  BIS central bankers’ speeches  algorithmic trading have become much more important and now make up more than half the trading in the electronic, interdealer cash market. This change in market structure has reduced the cost of trading in the interdealer market, especially for small trade sizes. Electronic trading enables the use of automated trading strategies which tend to employ speed for executing small-size trades, and the liquidity on electronic trading platforms allows traders to get in and out of positions quickly. The growth in high-frequency trading likely accounts for the reduction in trade size discussed earlier rather than this reduction being indicative of less liquidity. The movement toward electronic trading has allowed a more diverse set of actors to participate in the market, thereby increasing competition and likely leading to improved market liquidity. These changes, though, may have reduced the profitability of providing liquidity for dealers engaged in trading activity in the Treasury market. 2 Liquidity risk in the Treasury market may also reflect the growth in high-frequency trading rather than the impact of regulation.

Only through much more careful study and data analysis can we thoughtfully address the two most important questions – not whether regulation should be rolled back in order to return to the liquidity conditions prior to the financial crisis, but instead: •  whether there is a diminution of liquidity and/or an increase in liquidity risk that is costly or poses risks to financial stability or macroeconomic performance; and, if this this is the case,  3  This includes requirements for total loss-absorbing capital (TLAC), Title I resolution plan requirements and the option of Title II single point of entry resolution  4  See Joint Staff Report: The U.S. Treasury Market on October 15, 2014, pp 6–7. 6  BIS central bankers’ speeches  •  whether financial market regulation could be altered in a way that improves the balance between the benefits of tougher regulation in terms of enhanced financial stability versus the costs of such regulation, including any adverse impacts on market liquidity provision. In addition, whether microstructure reforms aimed at improving the functioning of markets could be promising in that respect. We certainly don’t want to undermine the progress we have made in making the financial system more robust and resilient. But if there are adjustments to regulation that could improve liquidity provision without increasing financial stability risks, we should be open to considering such changes. I suspect, however, making this determination will require considerably more data, research and reflection before we reach any definitive conclusions.