Liberty Street Economics

« | Main | »

August 17, 2015

Introduction to a Series on Market Liquidity


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.

This week, we will publish a series of five posts that shed light on the evolving nature of market liquidity. We kick off the series with a post that examines various measures of liquidity in the Treasury market. We then present three posts that consider the evolving role of high-frequency trading in financial markets, particularly the Treasury market. The last post documents the stagnation of dealer balance sheets since 2009 and explores possible drivers of this behavior. Following is a quick summary of the posts in the series:

  1. Has U.S. Treasury Market Liquidity Deteriorated? by Tobias Adrian, Michael J. Fleming, Daniel Stackman, and Erik Vogt. The issue of financial market liquidity has received tremendous attention of late. This emanates not only from market participants’ concerns that regulatory and structural changes have harmed dealers’ market-making abilities, but also from events such as the taper tantrum and the flash rally, in which sharp price changes were observed amid seemingly little news. But is there really evidence of a sustained reduction in liquidity? In this post, the authors address this question with respect to the U.S. Treasury market.
  1. Liquidity during Flash Events, by Ernst Schaumburg and Ron Yang. “Flash events”—extremely large price moves and reversals played out over just a few minutes—have occurred in some of the world’s most liquid markets in recent years. What makes these events remarkable is that they seem to have been unrelated to any discernable economic news during the event window, beyond the market movements themselves. In this post, the authors consider important similarities and differences between three major flash events that occurred between May 2010 and March 2015 in U.S. equities, euro-dollar foreign exchange, and the U.S. Treasury markets.
  1. High-Frequency Cross-Market Trading in U.S. Treasury Markets, by Dobrislav Dobrev and Ernst Schaumburg. The authors examine the increased correlation of high-frequency trading activity across assets and trading platforms, as illustrated by futures trading on the CME and benchmark bonds traded on interdealer platforms. The findings highlight the importance of both the changing nature of participation and the discrete technological changes that have enabled near instantaneous coordinated trading. Such trading maintains a stable pricing relationship between related assets, even during periods of extraordinarily high volatility.
  1. The Evolution of Workups in the U.S. Treasury Securities Market, by Michael J. Fleming, Ernst Schaumburg, and Ron Yang. 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. 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. The authors 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.
  1. What’s Driving Dealer Balance Sheet Stagnation? by Tobias Adrian, Michael J. Fleming, Daniel Stackman, and Erik Vogt. Securities brokers and dealers engage in the business of trading securities on behalf of their customers and for their own account, and use their balance sheets for trading operations, particularly market making. Total financial assets of dealers in the United States have shown no growth since 2009. This stagnation in their balance sheets raises the worry that dealers’ market-making capacity could be constrained, adversely affecting market liquidity. The authors investigate the stagnation of dealer balance sheets, focusing particularly on the boom and bust of the housing market and the ensuing financial crisis.


The views expressed in this post are those of the authors and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the authors.

Adrian_tobiasTobias Adrian is the associate director and a senior vice president in the Federal Reserve Bank of New York’s Research and Statistics Group.

Fleming_michaelMichael J. Fleming is a vice president in the Bank’s Research and Statistics Group.

Ernst_schaumburgErnst Schaumburg is an assistant vice president in the Federal Reserve Bank of New York’s Integrated Policy Analysis Group.

About the Blog

Liberty Street Economics features insight and analysis from New York Fed economists working at the intersection of research and policy. Launched in 2011, the blog takes its name from the Bank’s headquarters at 33 Liberty Street in Manhattan’s Financial District.

The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.

Liberty Street Economics does not publish new posts during the blackout periods surrounding Federal Open Market Committee meetings.

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.

Economic Research Tracker

Image of NYFED Economic Research Tracker Icon Liberty Street Economics is available on the iPhone® and iPad® and can be customized by economic research topic or economist.

Economic Inequality

image of inequality icons for the Economic Inequality: A Research Series

This ongoing Liberty Street Economics series analyzes disparities in economic and policy outcomes by race, gender, age, region, income, and other factors.

Most Read this Year

Comment Guidelines


We encourage your comments and queries on our posts and will publish them (below the post) subject to the following guidelines:

Please be brief: Comments are limited to 1,500 characters.

Please be aware: Comments submitted shortly before or during the FOMC blackout may not be published until after the blackout.

Please be relevant: Comments are moderated and will not appear until they have been reviewed to ensure that they are substantive and clearly related to the topic of the post.

Please be respectful: We reserve the right not to post any comment, and will not post comments that are abusive, harassing, obscene, or commercial in nature. No notice will be given regarding whether a submission will or will
not be posted.‎

Comments with links: Please do not include any links in your comment, even if you feel the links will contribute to the discussion. Comments with links will not be posted.

Send Us Feedback

Disclosure Policy

The LSE editors ask authors submitting a post to the blog to confirm that they have no conflicts of interest as defined by the American Economic Association in its Disclosure Policy. If an author has sources of financial support or other interests that could be perceived as influencing the research presented in the post, we disclose that fact in a statement prepared by the author and appended to the author information at the end of the post. If the author has no such interests to disclose, no statement is provided. Note, however, that we do indicate in all cases if a data vendor or other party has a right to review a post.