Most famously, in August 2012, Knight Capital – a firm engaged in market making and at the time the largest trader in US equities – lost $ million as a result of an undetected manual error in its algorithmic trading software. And in 2013, an error in a trading algorithm at HanMag Securities – a Korean brokerage firm – led it to place erroneous equity option trades, generating losses in excess of its capital. 17  As I noted above, end-users – corporates and asset managers – are increasingly splitting up larger trades into smaller pieces and trading them over a longer period. Doing so exposes them to more execution risk; that is, the risk that prices move against them before they have finished transacting – which traditionally was more the preserve of intermediaries. Some end-users are also now automating this trading process through the use of algorithms. Indeed, a recent Greenwich Associates survey found 21% of institutional asset managers and 10% of corporates do so in foreign exchange markets. 18  In so doing they swap one set of  risks for another, and the examples of losses by specialist firms in periods of fast market turbulence cautions against assuming that all end-users will effectively manage the new risks associated with the use of algorithms. These risks can exist through indirect as well as direct exposure to developments in fast markets. Many exchange-traded instruments (such as government bond futures and Exchange Traded Funds (ETFs)) are intrinsically linked with less liquid underlying (slower market) instruments.

One is that monetary policy is likely to be particularly effective because it affects all financial markets. Another view, that has been stated most forcefully by Lars Svensson, is that monetary policy is an inefficient and potentially even harmful tool for financial stability, since it is too unfocused and may have counterproductive macroeconomic effects. This is far from a theoretical matter: there is currently a lively debate on whether the current low interest rates in major jurisdictions are leading to “search-for-yield” behavior in certain financial market segments, potentially threatening financial stability, and whether this provides an additional motivation for normalizing monetary policy sooner rather than later. The view that seems to be gaining strength, and to which I subscribe, is to use macroprudential policy to maintain financial stability and allow monetary policy to focus on price stability. However, the definitive answer to this question will depend on the progress in the development of macroprudential policy tools and frameworks. Despite some positive experiences, including in Brazil, macroprudential tools are still insufficiently tested and the theoretical literature is in its infancy. The degree of success in using these tools will help determine whether there is a role for monetary policy in helping to achieve the financial stability goal. A second issue that has been the subject of considerable debate is the nature of monetary policy regimes. Before the crisis, there was a strong consensus on inflation targeting (or IT) as the most adequate monetary policy regime, due to its flexibility and transparency.