were in the pre - crisis period. dealers cite a number of reasons for this change, including reductions in their own risk appetite and the effects of post - crisis regulations. at the same time, the federal reserve and foreign owners ( about half of which are foreign central banks ) have increased their ownership to over two - thirds of outstanding treasuries ( up from 61 percent in 2004 ). banks have also increased their holdings of treasuries to meet hqla requirements. these holdings are less likely to turn over in secondary market trading, as the owners largely follow buy and hold strategies. 5 another change is the increased presence of asset managers, which now hold a bigger share of treasuries as well. mutual fund investors, who are accustomed to daily liquidity, now beneficially own a greater share of treasuries. perhaps the most fundamental change in these markets is the move to electronic trading, which began in earnest about 15 years ago. it is hard to overstate the transformation in these markets. only two decades ago, the dealers who participated in primary treasury auctions had to send representatives, in person, to the offices of the federal reserve bank of new york to submit their bids on auction days. they dropped their paper bids into a box. the secondary market was a bit more advanced. there were electronic systems for posting interdealer quotes in the cash market, and the globex platform had been introduced for futures. still, most interdealer trades were conducted over the phone and futures trading was primarily conducted in the open pit. today these markets are almost fully electronic. interdealer trading in the cash treasury market is conducted over electronic trading platforms. 6 thanks to advances in telecommunications and computing, the speed of trading has increased at least a millionfold. 7 advances in computing and faster access to trading platforms have also allowed new types of firms and trading strategies to enter the market. algorithmic and high - frequency trading firms deploy a wide and diverse range of strategies. in particular, the technologies and strategies that people associate with high frequency trading are also regularly employed by broker - dealers, hedge funds, and even individual investors. compared with the speed of trading 20 years ago, anyone can trade at high frequencies today, and so, to me, this transformation is more about technology than any one particular type of firm. given all these changes, we need to have a more nuanced discussion as to the state of the markets. are there important market failures

is by attempting to internalize their customer trades – essentially trying to create their own markets by finding matches between their customers who are seeking to buy and sell. internalization allows these firms to capture more of the bid - ask spread, but it may also reduce liquidity in the public market. at the same time it does not eliminate the need for a public market, where price discovery mainly occurs, as dealers must place the orders that they cannot internalize into that market. while the changes i ’ ve just discussed are unlikely to go away, i believe that markets will adapt to them over time. in the meantime, we have a responsibility to make sure that market and regulatory incentives appropriately encourage an evolution that will sustain market liquidity and functioning. in thinking about market incentives, one observer has noted that trading rules and structures have grown to matter crucially as trading speeds have increased – in her words, “ at very fast speeds, only the [ market ] microstructure matters. ” 8 trading algorithms are, after all, simply a set of rules, and they will necessarily interact with and optimize against the rules of the trading platforms they operate on. if trading is at nanoseconds, there won ’ t be a lot of “ fundamental ” news to trade on or much time to formulate views about the long - run value of an asset ; instead, trading at these speeds can become a game played against order books and the market rules. we can complain about certain trading practices in this new environment, but if the market is structured to incentivize those practices, then why should we be surprised if they occur? the trading platforms in both the interdealer cash and futures markets are based on a central limit order book, in which quotes are executed based on price and the order they are posted. a central limit order book provides for continuous trading, but it also provides incentives to be the fastest. a trader that is faster than the others in the market will be able to post and remove orders in reaction to changes in the order book before others can do so, earning profits by hitting out - of - date quotes and avoiding losses by making sure that the trader ’ s own quotes are up to date. technology and greater competition have led to lower costs in many areas of our economy. at the same time, slower traders may be put at a disadvantage in this environment, which could cause them to withdraw from markets or seek other venues, thus fracturing liquidity. and