axel a weber : financial stability and globalisation opening address by professor dr axel a weber, president of the deutsche bundesbank, at the second conference of the monetary stability foundation on “ financial stability and globalisation ”, frankfurt am main, 3 june 2004. * * * it is an exceptional pleasure and an honour for me to welcome you to the second conference of the monetary stability foundation. i would like to extend a special welcome to the distinguished members of the diplomatic corps present this afternoon, peter w bodde, us consul general in frankfurt and leonidas contovounesios, consul general of the hellenic republic in frankfurt. it is a great pleasure to be able to welcome governors of central banks from all over europe : jaime caruana, governor of the banco d ’ espana, ljubisa krgovic, governor of the central bank of montenegro, and dr jean - pierre roth, chairman of the governing board of the swiss national bank. i am exceptionally pleased to be able to welcome professor helmut schlesinger, president of the deutsche bundesbank from 1991 to 1993. i am glad to have with us today jurgen hettinger, president of the frankfurt regional office of the deutsche bundesbank. thank you for hosting this conference. and, last but not least, i would like welcome the distinguished speakers who will make this conference an inspiring event : professor giancarlo corsetti, professor gerhard illing, professor philip lane, professor andrew k rose, professor karlhans sauernheimer, associate professor philip e strahan. ladies and gentlemen! i came into office as president of the deutsche bundesbank only five weeks ago. i have my roots in academia, and in this line of work i have participated frequently in conferences on monetary issues, not least various conferences hosted by the institution i am now entrusted with. therefore, my introduction “ it is an exceptional pleasure and an honour ” is meant literally. 1. the importance of monetary stability the overarching purpose of the monetary stability foundation is to strengthen public awareness of the great importance of monetary stability. this objective is to be pursued mainly by means of financing research on monetary issues, thereby broadening the intellectual foundation of stability policy. in december 2002, the monetary stability foundation held a first conference. since then, developments - and debates - have underlined just how important the nonstop emphasis on stability is. i would like to briefly comment on three issues that stand out in this respect.

. i am not going to spend time discussing the causes of these events ; suffice to say that there was news of an unexpected sort, and the size of the resulting moves points to greater sensitivity in the response of markets. the ability of markets to trade without triggering major price moves was limited. that said, by the end of both days, volatility had reduced, prices had retraced a portion of their peak intra - day moves and liquidity returned. this quick stabilisation helped to limit contagion to other markets, and thus wider effects on the stability of the financial system. should we therefore be concerned? my answer to that is we should certainly be keenly interested. i agree with the conclusion of the federal reserve bank of new york that understanding the manner in which the evolving market structure is affecting market liquidity, efficiency and pricing is highly important ( potter ( 2015 ) ). this conclusion has been reinforced in the recent publication of the senior supervisors group ( ssg ) in which the pra participates ( senior supervisors group ( 2015 ) ). the ssg has concluded that “ key supervisory concerns centre on whether the risks associated with algorithmic trading have outpaced control improvements. the extent to which algorithmic trading activity, including hft, is adequately captured in banks ’ risk management frameworks, and whether standard risk management tools are effective for monitoring the risks associated with this activity, are areas of inquiry that all supervisors need to explore ”. as supervisors of almost all of the world ’ s major trading banks – through their operations in london – we can provide some helpful assessment of these events. we have observed that the balance between aggregate buy and sell orders submitted to banks ’ electronic trading systems can shift instantaneously, and sometimes violently, upon this type of occurrence. bis central bankers ’ speeches the impact is often exacerbated by the simultaneous reduction in order book depth on organised multilateral electronic trading venues. the electronic trading contribution was more evident on 15 january, as a foreign currency market event than the 15 october ( a bond market event ), reflecting the different patterns of trading in these markets. on the 15 january, the ability of banks ’ e - trading systems to hedge positions consistently through automatic risk management broke down as the necessary reference prices became discontinuous and unreliable. the algorithms of automatic trading have rules embedded in their code such that quotes are immediately pulled if there is a severe market liquidity event. moreover, the algorithms often have automatic rules