that liquidity may be less resilient than it had been previously. but this evidence is not particularly robust, and, given the limitations of the existing data, it is difficult to know the extent to which liquidity resilience may have declined. as we continue to investigate quantitative evidence of the deterioration in the resilience of liquidity in some of the financial markets, we are also trying to tease out the various drivers of liquidity conditions, such as changes in regulation, trading strategies, and market structure. regulatory changes are often cited as a contributing factor. trading financial assets is a balance - sheet - intensive activity, and the dodd - frank act, has created incentives for institutions to carefully assess the risks of such activity through stricter requirements on leverage, liquidity, and proprietary trading, raising the cost of market making and possibly affecting market liquidity. indeed, there is evidence of reductions in broker - dealer bond inventories in recent years. nonetheless, since not all broker - dealer inventories are used for market - making activities, the extent to which lower inventories are affecting liquidity is unclear. moreover, reductions in broker - dealer inventories occurred prior to the passage of the dodd - frank act, suggesting that factors other than regulation may also be contributing. in assessing the role of regulation as a possible contributor to reduced liquidity, it is important to recognize that those regulations were put in place to reduce the concentration of liquidity risk on the balance sheets of the large, highly interconnected institutions that proved to be a major amplifier of financial instability at the height of the crisis. a second possible contributor may be the growing role of electronic execution of trades across equity, treasury, and foreign exchange markets and the associated increasing role of high - frequency trading. competition from high - frequency trading in a particular market may reduce the attractiveness of that market for traditional ( manual ) traders or slower automated traders, leading to a progressive shift in the composition of market participants toward highfrequency traders ( hfts ) over time. this shift could be important to the extent that hfts may have more limited capacity to support liquidity resilience since, on average, hfts appear to trade with smaller inventories and lower capital than traditional traders. although having less inventory and capital reduces the cost of trading, it also means that markets increasingly dominated by hfts may be less able to absorb large shocks. thus, liquidity may be sufficient and relatively cheap on normal trading days

, but it may not be deep enough to prevent large price swings when demand for liquidity is significantly above the norm. this consideration would be most relevant in the markets that are amenable to high - frequency trading, and automated trading more generally, where assets are fairly standardized, such as equities and u. s. treasury securities, and less relevant in markets where securities are more idiosyncratic, such as corporate bonds. it is also possible that markets that more readily lend themselves to high - speed trading may be characterized by relatively greater concentration over time. achieving the speed necessary for high - frequency trading requires large technology investments that necessarily may support a relatively more limited number of market participants. greater concentration in turn might be associated with lower resilience at times of stress. the possible effect of hfts on the resilience of market liquidity is an important topic for future research. of course, other developments may be affecting liquidity in financial markets. for example, market participants have indicated that changes in participants ’ risk - management practices may be contributing to reduced market liquidity. in particular, the experience of the financial bis central bankers ’ speeches crisis may have led many participants to reevaluate the risk of their market - making activities and either reduce their exposure to that risk, become more selective, or charge more for it, thereby reducing liquidity. 4 it is also worth noting the increased role of asset managers on the buy side of the fixed income markets. during normal market conditions, the demand for liquidity from this group of bond holders is likely relatively small, since asset managers acting on behalf of retail investors generally buy bonds to hold them for some period. moreover, managers of openend funds hold liquidity buffers that enable them to respond smoothly to normal redemption demands. however, because the large increase in bond fund holdings is relatively recent, little is known about how these funds will react to periods of market stress or to abrupt changes in financial conditions and the adequacy of their liquidity buffers for such situations. because funds potentially allow daily redemptions even against illiquid assets, it is possible that redemptions could be magnified in stressed conditions as individuals try to redeem early, which in turn could lead to liquidations of relatively less liquid assets, thereby amplifying price volatility and reducing market liquidity. if in fact liquidity resilience has declined recently, it may be a transitional development that will be corrected going forward as