The speech flags that we are living in an era of predictable volatility but that we must now expect to face it as a constant. Mr Rathi notes that the UK has a chance to lead how capital markets can drive economic growth and development, and highlights the need to nurture liquidity, shift regulation and adopt a new mindset towards risk. He reminds the industry that no single entity has all the answers that “it will take action from us all”.
Mr Rathi gives examples of events he has seen during his career that show just how volatile markets can be, including Brexit, the pandemic and conflict in the Middle East.
Reasons discussed for the sharp rise in volatility and resulting risk include:
- Technology, including the use of algorithms (which accounted for up to 60% of trading in major US exchanges as early as 2009), and the potential for a single glitch to “run haywire through global infrastructure”.
- Market concentration, with just 10 firms representing nearly 50% of the FTSE 100’s value and similar trends in the US. Mr Rathi also notes that investment management is increasingly centralised in the largest firms, and that a few providers control most of the world’s data and increasingly partner with a handful of Big Tech names that dominate the cloud as well as AI services.
- Tougher liquidity conditions add to this fragility – today’s more fragmented system (exchanges, private markets, ETFs and derivatives) works in normal times but becomes harder to trade when volatility strikes.
- The increased interconnectedness of financial systems, which means events in one country can quickly have profound effects elsewhere.
The speech notes that volatility per se is not the issue and should not be conflated with systemic risk, but warns that excessive moves, especially intraday, due to runaway volatility that dislocate prices from fundamentals are the central concern.
Mr Rathi suggests ways in which the FCA and market participants can act to address the predictable volatility in the market, including:
- Nurturing liquidity – the FCA is exploring how adjustments could encourage wholesale trading and improve market liquidity, and may in turn reduce barriers to entry for specialised trading firms that don’t hold retail deposits.
- Shifting from reactive to proactive regulation, and a system guided by good outcomes rather than having rules for the sake of it.
- Having a new mindset towards risk – Mr Rathi notes that UK markets stay relevant because they are always open to reform, and that the FCA has often been at the heart of progress.
- Investing in infrastructure and getting better at piloting and adopting tech, whilst noting that cybersecurity is critical.
- Deep market engagement – the FCA wants to hear from “all corners of the market”, including big and small, and public and private companies to understand the root causes of shocks and how they can be managed.