Briefings

Week InReview: October 13, 2017

On Bond Market Liquidity -

"In corporate bonds, the different measures of liquidity tell a mixed story. Record trading volumes and low bid-ask spreads indicate good liquidity, while reduced frequency of block trades suggest more difficulty in moving large blocks of risk. However, these oft-cited measures do not capture the full story. For example, bid-ask spreads have decreased primarily for retail investors, rather than for institutional investors.

"Moreover, measures of trading activity only capture activity that has occurred, not trades foregone by market participants because liquidity was not available or the cost was too high. Liquidity metrics also generally do not convey the reduction in immediately available trading opportunities. Such opportunities have declined as more dealers act as agents, and accordingly customers must wait until the opposite side of the trade has been found. Finally, market participants report that dealer willingness to make markets in size, take on risk, and provide firm quotes have all declined."

- The Treasury report on capital markets deregulation

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