Liberty Street Economics
August 21, 2015

What’s Driving Dealer Balance Sheet Stagnation?



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Fifth in a five-part series

Securities brokers and dealers (“dealers”) engage in the business of trading securities on behalf of their customers and for their own account, and use their balance sheets primarily for trading operations, particularly for market making. Total financial assets of dealers in the United States have not shown any growth since 2009. This stagnation in their balance sheets raises the worry that dealers’ market-making capacity could be constrained, adversely affecting market liquidity. In this post, we investigate the stagnation of dealer balance sheets, focusing particularly on the boom and bust of the housing market.

Posted by Blog Author at 7:00 AM in Financial Institutions | Permalink | Comments ( 4 )

August 20, 2015

The Evolution of Workups in the U.S. Treasury Securities Market



Fourth in a five-part series
The market for benchmark U.S. Treasury securities is one of the deepest and most liquid in the world. Although trading in the interdealer market for these securities is over-the-counter, it features a central limit order book (CLOB) similar to that found in exchange-traded instruments, such as equities and futures. A distinctive feature of this market is the “workup” protocol, whereby the execution of a marketable order opens a short time window during which market participants can transact additional volume at the same price. With the broadening of the interdealer market to include hedge funds and proprietary trading firms, and the increase in trading activity, some market participants consider the workup to be somewhat of an anachronism that is destined to lose its relevance relative to the CLOB. Contrary to this notion, we document the continued important role played by the workup, show some ways in which trading behavior in the workup has evolved, and explain some of the observed changes.

Posted by Blog Author at 7:00 AM | Permalink | Comments ( 0 )

August 19, 2015

High-Frequency Cross-Market Trading in U.S. Treasury Markets



Third in a five-part series
The U.S. Treasury market is one of the deepest and most liquid markets in the world, with significant trading in both Treasury futures and benchmark securities. In this post, we examine the pattern of trading activity in these instruments and document the substantial increase in cross-market trading (simultaneous order placement and execution in multiple markets) in recent years, highlighting the impact of technological advancements that allow nearly instantaneous trading across assets and trading platforms. Identifying the growing role played by high-frequency trading in U.S. Treasury markets is important for understanding the price discovery process. Our findings suggest that price discovery takes place on both futures and cash markets and that cross-market trading helps maintain the tight link between the two.

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments ( 1 )

August 18, 2015

Liquidity during Flash Events



Second in a five-part series
“Flash events,” extremely large price moves and reversals over just a few minutes, have occurred in some of the world’s most liquid markets in recent years. What’s made these events remarkable is that they seem to have been unrelated to any discernable fundamental economic news that may have taken place during the events. In this post, we consider a few of the important similarities and differences among three major flash events in the U.S. equities, euro–dollar foreign exchange (FX), and U.S. Treasury markets that occurred between May 2010 and March 2015. All three flash events involved high trading volumes and long-term impacts on depth, but the U.S. Treasury event stands out in terms of both price volatility and price continuity.

August 17, 2015

Has U.S. Treasury Market Liquidity Deteriorated?



First in a five-part series
The issue of financial market liquidity has received tremendous attention lately. This partly arises from market participants’ concerns that regulatory and structural changes have reduced dealers’ market making abilities, but also from events such as the taper tantrum and the flash rally, in which Treasury prices fluctuated sharply amid seemingly little news. But is there really evidence of a sustained reduction in Treasury market liquidity?

Posted by Blog Author at 7:02 AM in Financial Markets | Permalink | Comments ( 5 )

Introduction to a Series on Market Liquidity



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Market participants and policymakers have recently raised concerns about market liquidity—the ability to buy and sell securities quickly, at any time, at minimal cost. Market liquidity supports the efficient allocation of capital through financial markets, which is a catalyst for sustainable economic growth. Changes in market liquidity, whether due to regulation, changes in market structure, or otherwise, are therefore of great interest to policymakers and market participants alike.

Posted by Blog Author at 7:00 AM in Financial Markets | Permalink | Comments ( 0 )

August 14, 2015

The Monetary Policy Advice Process at the New York Fed



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The Research Group at the New York Fed, like the research divisions at the other regional Feds, is charged with providing advice on monetary policy to the Bank president. In addition, the role of research at this institution is related to two features of the New York Fed: first, the New York Fed president is a voting member of the Federal Open Market Committee (FOMC), and second, the Open Market Desk located at the New York Fed implements the policy decisions of the FOMC. In this post, we provide a brief introduction to the process whereby research economists, collaborating with staff in the Markets Group and the Integrated Policy Analysis [IPA] Group, provide policy advice to the Bank president. Because the FOMC meeting is the focus for monetary policy advice within the Fed, our discussion of the policy process will be organized around the FOMC cycle.

Posted by Blog Author at 10:00 AM in Monetary Policy | Permalink | Comments ( 0 )

August 13, 2015

Just Released: Releveraging the Consumer Credit Panel with Two New Charts



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Our Consumer Credit Panel, which is based on data from the Equifax credit reporting agency, first arrived at the New York Fed in 2009, and our very first Quarterly Report on Household Debt and Credit was published in August 2010, five years ago this month. We’ve continued to produce the same report, with very few changes, since the report’s initial release. However, with today’s release of the report for the second quarter of 2015, we’re beginning to make some changes, starting with two new charts that provide granularity on mortgage loan originations. These data are identical to the originations data that we’ve released previously, but we now report origination volume by credit score groups. The new charts’ form will be familiar to those who have seen our earlier work on auto loans or the U.S. Economy in a Snapshot, and will leverage some of the detail that we have in our dataset on new extensions of credit and underwriting standards.

Posted by Blog Author at 11:15 AM in Household Finance , Housing | Permalink | Comments ( 0 )

August 12, 2015

Do Asset Purchase Programs Push Capital Abroad?

Thomas Klitgaard and David Lucca

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Euro area sovereign bond yields fell to record lows and the euro weakened after the European Central Bank (ECB) dramatically expanded its asset purchase program in early 2015. Some analysts predicted massive financial outflows spilling out of the euro area and affecting global markets as investors sought higher yields abroad. These arguments ignore balance of payments accounting, which requires any financial outflow from the euro area to be matched by a similar-sized inflow, absent a quick and substantial current account improvement. The focus on cross-border financial flows also is misguided since, according to asset pricing principles, the euro and global asset prices can move without any change in financial outflows.

August 11, 2015

Around the World in 8,379 Foreign Entities



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The largest U.S. financial institutions conduct business around the world, maintaining a strong presence through branches and subsidiaries in foreign countries. This blog post highlights trends in their foreign ownership over the past twenty-five years, complementing recent research from the New York Fed on large and complex banks. We document a constant decline in the importance of foreign branches for U.S. financial institutions, an increase in the complexity of foreign subsidiary networks, and a shift of activity from Latin America and the Caribbean to Europe and other regions.

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Liberty Street Economics features insight and analysis from economists working at the intersection of research and policy.

The views expressed are those of the authors, and do not necessarily reflect the position of the New York Fed or the Federal Reserve System.

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