trade can be executed. this has encouraged some firms to begin relocating their servers as close as physically possible to the trading exchange – so - called “ co - location ”. this is the financial equivalent of seeking the apartment closest to the sea. it, too, fuels arms - race behaviour : “ however fast they went, they never seemed to pass anything ”. accompanying this shift in speed has been a dramatic change in the composition of trading and market - making. during this decade, so - called high frequency trading ( hft ) has come to dominate. it now accounts for anywhere between a half and three - quarters of trading volume on the world ’ s major equity markets and a rising share of futures and other derivative markets. 20 in some markets, hft firms have become the de - facto liquidity providers or market - makers. 21 historically, designated market - makers were often granted privileges in return for agreeing to ensure trade and price continuity. no longer : the sleek have inherited the earth. this emerging topology of trading has had some clear benefits. this is manifest in narrower, sometimes dramatically narrower, bid - ask spreads for trading. 22 for equity markets, these have fallen by an order of magnitude since 2004. this is typically taken as evidence of improved market liquidity and price efficiency. but this dominant role for hft, in their race to zero, has also had some potentially less benign side - effects. take order cancellations. all market participants cancel some of the orders they place before they are executed. hft firms have taken this to new levels, submitting many ( many ) more order messages than they are willing to execute. a decade ago, ten orders might be cancelled for every one executed. today, that order cancellation ratio can be closer to 60 ( chart 4 ). there are some good reasons for order cancellation, including the arrival of price news after an order has been placed. but there are, too, some potentially jarring side - effects. with hft firms serving as de - facto market - makers, but with the vast majority of their orders cancelled, many on - screen quotes may not actually be executable. this creates a potentially misleading picture of market resilience, a mirage of liquidity. second, because bandwidth is finite, submitting multiple quotes may slow down activity by competitor traders. this practice of clogging competitors ’ screens is known, accurately if inelegantly, as “ quote stuffing ”. 23 it is a classic congestion external

relative rise in uk, and us, interest rates, reflecting the relative strength of our cyclical positions compared with those in japan or continental europe, are overdone, and they should in any event reduce as recovery takes hold in those other countries. and present market perceptions of the euro as a potentially weak currency if the maastricht convergence criteria are not rigorously enforced, may also come to be seen to be exaggerated. there is in fact some suggestion, in currency options prices, that markets see a larger downside than upside risk to sterling against the dm in the course of this year. in the meantime, policy judgments are likely to remain unusually difficult. when we confronted a similar dilemma in the 1980s, the domestic expansion was allowed for some time to continue unchecked, but in the end we were driven to bring it to a jarring halt. i do not suggest for a moment that we are anywhere close to that situation now. our aim is precisely to avoid that. but that experience does illustrate that, in the final analysis, there could be real dangers in allowing justified concern about the exchange rate to deflect us for too long from moving gradually to moderate the upswing. i emphasise the words “ gradually ” and “ moderate ”. the choice ultimately in this situation is not whether or not ; it is sooner or later, less or more. our present dilemma - and it is a real dilemma - serves to illuminate the debate about the economics pros and cons of european monetary union, and the difficult decisions that will face all eu countries in little over a year from now. on the one hand, the real attractions - to manufacturers in particular - of exchange rate fixity within the euro area, are amply apparent. on the other hand, our dilemma - and we are not alone in this dilemma within europe - points up the problem that would arise if the single european monetary policy - the single interest rates - does not meet the domestic monetary policy needs of all the euro - member countries. this could happen for a number of reasons - related to different cyclical positions, different fiscal positions, or as a result of external shocks or structural changes. the famous maastricht criteria for sustainable convergence that are to be met, according to the treaty, before a country qualifies for the single currency were designed precisely to reduce the risks of tensions of this sort arising after the start. i should like to think that the political leaders across europe, who