By Sam van de Schootbrugge 30-09-2020

How Market Liquidity Disappeared During The COVID-19 Crisis

(4 min read)
Resize text:


The Essence of the Piece

The Fed conducted a study on Treasury market liquidity during the height of the COVID-19 crisis. They found that trading algos used by principal trading firms didn’t provide liquidity during the crisis as many had hoped. Instead, market depth disappeared, and bid-ask spreads surged and became more volatile. The Fed also found a big deterioration in the usually very liquid FX markets. This adds to the growing case for understanding how bouts of illiquidity are one the biggest risks for investors.

The Structure of Treasury Markets

The US Treasury market is one of the most liquid markets for government securities in the world. Within that market, the ‘dealer-to-dealer’ (interdealer) segment, rather than the ‘dealer-to-client’ segment, is thought to be the most liquid. Moreover, most of the interdealer flows occur over electronic trading platforms such as BrokerTec and Dealerweb. And with the growth of such platforms, there’s also been a big increase in non-bank dealers or principal trading firms (PTFs). They employ high-speed automated trading strategies and often account for over half the trading volumes on the platforms. In this context, the Fed researchers analysed Treasury market conditions in the interdealer market over March.

TO READ THIS DEEP DIVE
SUBSCRIBE TO MACRO HIVE PRIME

£39/month thereafter

For access to our Slack Chat Room, where we discuss all things markets with our researchers and subscribers

START YOUR FREE TRIAL


MOST READ

ECB Preview: Biding Time Until June (2 min read)

By Caroline Grady | Apr 20, 2021
Stepped up PEPP purchases since the 11 March ECB meeting leave little need for any policy changes at this week’s governing council meeting...

Russia Sanctions: The Shock That Never Came (5 min read)

By Tatiana Orlova | Apr 16, 2021
The most important measure bars US entities from newly issued local sovereign debt, effective from 14 June. The ban includes debt issued by the CBR...

Weekly Vaccination Update: J&J Pause and EU Supply Schedule (1 min read)

By Sam van de Schootbrugge | Apr 14, 2021
In this prime tracker, we review the latest vaccine developments globally. This week, we’ve added some brief commentary...

PREMIUM CONTENT

ECB Preview: Biding Time Until June (2 min read)

By Caroline Grady | Apr 20, 2021
Summary Thursday’s ECB meeting is unlikely to…

Five Things You Did Not Know About China (2 min read)

By Bilal Hafeez | Apr 13, 2021
China is a global economic superpower, yet…

Want To Join Our Community Of Leading Investors And Researchers In Our Slack Chat Room?