The head of the Financial Conduct Authority (FCA), Nikhil Rathi, has raised concerns that market shocks, which once occurred about every ten years, are now becoming a monthly occurrence. This shift is attributed to advancements in technology, the influence of major corporations, and tighter liquidity conditions that are amplifying market volatility.

Rathi highlighted that the increasing interconnectedness of global markets has established an environment characterized by what he referred to as “predictable volatility.” His remarks coincided with comments from Nathanaël Benjamin, the Bank of England’s executive director for financial stability strategy and risk, who described the current market situation as “very jittery” and noted the Bank’s close monitoring of developments in the Middle East.

Benjamin pointed out that fluctuations in oil prices are a critical area of focus amidst the ongoing volatility.

The most recent significant market decline occurred in early August, resulting in widespread drops in equity markets across the globe. This downturn was influenced by disappointing earnings reports from major U.S. technology firms and weaker labor market data in the United States.

Rathi commented that even minor disturbances can have ripple effects across various sectors, including equities, fixed income, foreign exchange, commodities, and even cryptocurrencies. He remarked, “Events that used to be rare have now become commonplace, happening every month instead of every decade.”

He attributed this escalation in frequency to the pervasive nature of technology in finance and other sectors, explaining that a single technological glitch can disrupt the entire global infrastructure.

Tighter liquidity conditions have further exacerbated the existing fragility in the markets. Rathi mentioned the risks associated with market concentration, stating that just ten companies account for nearly half of the FTSE 100’s total value, while seven firms were responsible for over half of the S&P 500’s remarkable 26.3% return last year.

Rathi indicated that the FCA is currently analyzing the events that transpired in August to identify any emerging systemic risks that might warrant further scrutiny.

Benjamin reiterated the Bank’s earlier warnings about the market’s vulnerability to sudden corrections and emphasized the importance of observing rising oil prices closely.

Additionally, he mentioned that shipping routes are also under assessment due to prior disruptions and delayed shipping times earlier in the year. However, he noted that supply chains have been largely able to adapt to these changes.

Rathi advocated for the UK to take a leadership role in ensuring that its financial system is resilient enough to manage future crises. He stated that the FCA is aiming to transition from a reactive to a proactive regulatory approach. Recent modifications to the UK’s listing rules and efforts to update prospectuses illustrate the agency’s commitment to adapting to the realities of an era marked by increased volatility.

Furthermore, Rathi indicated that the regulator is considering adjustments to regulations in the City to enhance liquidity and support the expansion of specialized trading firms, which have seen rapid growth in the U.S. in recent years. Companies like Jane Street and Citadel Securities have emerged as significant competitors to banks for trading activities.

Rathi noted, “Regulations designed for large global banks, which carry heavier capital requirements, often hinder smaller firms from effectively contributing liquidity. We are exploring ways to modify these rules to encourage wholesale trading, boost market liquidity, and potentially lower entry barriers for specialized trading firms that do not manage retail deposits.”

He concluded by highlighting the shift towards non-bank traders dominating U.S. equity flows, a significant change observed within just a few years.