Addressing a Federal Reserve Bank of Atlanta conference, Greenspan warned that failure to modernise the system could create serious capacity problems, and even compromise the entire equity market when trading volumes jump in times of increased volatility.

"Already there are signs that trading volumes are straining the capacity of the infrastructure," he said. "Many fear that, without a complete re-engineering of the process...further increases in trading volumes, driven in part by the ongoing decimalisation of equity prices, will soon result in serious capacity problems," he added noting that such developments "clearly must be a significant concern for policy makers". Equity and other securities trades are usually settled by the third business day after the trade occurs, but growing trading volumes - driven by the development of new technology - has led to errors and delays in settlement and thus increased risk to all participants, Mr Greenspan said.

"Furthermore, should capacity problems emerge because of a volatility-induced spike in trading volumes, the equity markets themselves could be compromised," he said and added that efforts by the Securities Industry Association to shorten the settlement process from three to one business days "deserve support and encouragement". But he also noted that the task of overhauling the system was up to the private sector, not to policy makers. "It has never proved wise for policy makers to try to direct the evolution of markets, and it strikes me as especially problematic at this juncture," he said.

The powerful central bank chief said the key was to let free market forces work unhindered. Equity markets will inevitably shift capital from the losers to the winners," he said. "In most cases, the losers will fade away without placing any burdens on their creditors. But some undoubtedly will fail. This is a tendency that should not be resisted." Mr Greenspan's speech, transmitted via video link to the Atlanta Fed's Financial Markets Conference in Sea Island, Ga., did not address the outlook for the US economy or short-term interest rates.

(Reuters)