Greenspan Urges Attention to Market Liquidity, Fragmentation

April 13, 2000 ( - Central banker Alan Greenspan Thursday suggested policymakers allow the proliferating financial exchanges to centralize, because "in times of stress, liquidity simply may not be there or it may not be there in depth." But he expressed doubts about the wisdom and technical feasibility of forced centralization.


The comments of Chairman of the Federal Reserve Board appeared in testimony prepared for April 13 Senate Banking Committee hearings. The hearings were called to examine the effects of market fragmentation on market efficiency and investor protection.

Following prepared remarks, the Senate committee invited Greenspan to comment on whether the government should centralize trading venues such as NASDAQ and the New York Stock Exchange for cheaper, more efficient trading. “It has never proved wise for policymakers to try to direct the evolution of markets, and it strikes me as especially problematic at this juncture,” Greenspan said.  However, he noted he was “expressing my own views and not necessarily those of the Federal Reserve Board.”

Behind the curve

“Given the pace of change in our markets, it is difficult to contemplate how a government mandate could be implemented” that would centralize and link exchanges and trading networks, Greenspan said.  “Systems might well be obsolete before we were half-way through the planning process.”  The recent and explosive growth of electronics communications networks (ECNs) have expanded trading options and hours for investors, but within certain limits.

Still, having too many trading venues could mean “not all orders to buy and sell securities necessarily have the opportunity to interact with one another,” Greenspan said. He said fragmentation “raises questions about quality and completeness of the price discovery process and concerns that investors’ orders to buy and sell securities may not be executed at the best price or the lowest cost.”


Greenspan found the potential lack of market liquidity “worrisome…particularly in times of stress” and cautioned institutional investors to “better assess the possible consequences of market illiquidity.”  Greenspan expressed doubt about whether current equity trading systems had been fully tested for their resiliency under extreme conditions.

Large Wall Street brokerage firms like Merrill Lynch and Goldman Sachs favor a centralized stock order book.  But the New York Stock Exchange and the NASDAQ Stock Market claimed this would reduce competition and innovation.