Just Released: Money and Payments Workshop Examines Financial Market Structure

Thomas Eisenbach

We’ve recently posted the proceedings of an October 19 Money and Payments Workshop that brought together researchers from central banks and academia as well as practitioners to discuss the importance of financial market structure. The agenda included items hotly debated since the recent financial crisis, including central clearing, over-the-counter markets, “dark pools,” and network structures. The main theme of the workshop was the effect that market structure has on the incentives of the parties involved, the liquidity of the transactions conducted, and the efficiency of the economic outcomes achieved. This post briefly describes the six papers presented.

    
The workshop began with a set of three theoretical papers studying the subtleties involved in centrally clearing bilateral transactions between financial institutions. This has been an important component of recent financial reform efforts, with the aim of increasing transparency and reducing systemic risk among highly interconnected market participants. The papers analyzed features observed in central clearing, illustrated the role played by collateral required by central counterparties, and explored the effect of clearing design on the information sensitivity of transactions.

    
Next, two empirical studies investigated the role of market structure in bond trading. One study compared the details of trading on new electronic auction platforms with trading in traditional over-the-counter relationships. The other used data on municipal bond trading to map out the network of financial intermediaries. This allows for tracing of the transaction sequence that begins with an investor selling a bond to an intermediary, then continues with the bond potentially being traded from one intermediary to another, and ends with an investor who ultimately buys and holds the bond.

    
Finally, a paper on so-called dark pools—new trading venues for equities that don’t contribute to price
discovery—was presented. The paper examined whether the increasing prominence
of dark pools could increase overall price efficiency because it may lead to
informed traders concentrating in exchanges and uninformed traders
concentrating in dark pools.

    
All of the papers presented are at the frontier of current research, and provide important insights into the trade-offs involved in efforts to reform financial market structure with the goal of enhancing financial system stability.

Disclaimer
The views expressed in this post are those of the author 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 author.

Thomas Eisenbach is an economist in the Federal Reserve Bank
of New York’s Research and Statistics Group.