Learning objectives: Describe how the fixed income markets have been evolving. Explain the drivers behind the electronification of fixed income markets. Identify and describe the implications that electronification has on market quality. Compare the qualifications of traditional instruments of liquidity conditions and the new market environment
Questions:
705.1. Over the five year period from 2010 to 2104 (i.e., the period surveyed by Bech et al), which category of fixed income saw the most rapid growth on electronic trading platforms (ETPs)?
a. Corporate
b. Sovereign
c. Interest rate swaps
d. Credit default swaps
705.2. The authors of this reading ask the question, "Is electronification harming market robustness?" Their answer draws on observations in a comparison between two markets:
a. Neither market experienced adverse jumps in liquidity conditions
b. Both markets experienced adverse jumps in both bid-ask spreads and quoted depth
c. Adverse liquidity jumps occurred in quoted depth for the Treasury market (but not materially in bid-ask spreads); however for BTP market the jumps occurred in bid-ask spreads (but not materially in depth)
d. The conclusions demonstrate that (i) electronic trading has not changed dynamics of market responses to imbalances in supply and demand, (ii) but has permanently changed the underlying economic mechanism of how liquidity risks unfold, and (iii) that the susceptibility to a sudden evaporation of liquidity depends almost entirely on the underlying market microstructure
705.3. In regard to the implications of electronification on fixed income markets and market quality, each of the following statements is true EXCEPT which is false?
a. Traditional gauges of liquidity conditions may be less suitable in the new market environment
b. Electronification in dealer-to-dealer platforms associates with a decline in the role of principal trading firms (PTFs) but a dramatic increase in the role of banks and broker-dealers
c. the drivers behind the electronification of fixed income markets have included each of (i) technological advances, (ii) changes in the demand for liquidity services, and (iii) regulatory reforms
d. In regard customer segments and platforms, the dealer-to-customer segment grew faster than either the dealer-to-customer or all-to-all segments; and platforms relying on request-for-quote (RFP) grew faster than central limit order book (CLOB) or click-to-trade (CTT)
Answers here:
Questions:
705.1. Over the five year period from 2010 to 2104 (i.e., the period surveyed by Bech et al), which category of fixed income saw the most rapid growth on electronic trading platforms (ETPs)?
a. Corporate
b. Sovereign
c. Interest rate swaps
d. Credit default swaps
705.2. The authors of this reading ask the question, "Is electronification harming market robustness?" Their answer draws on observations in a comparison between two markets:
- Bid-ask spreads and quoted depth for 10-year US Treasury notes, where trading takes place on a fully automated central limit order book (CLOB)
- Bid-ask spreads and quoted depth for 10-year Italian government bonds (buoni del tesoro poliennali, BTPs), where liquidity is exclusively provided by dealers that commit to quoting executable prices; i.e., click-to-trade, CTT
a. Neither market experienced adverse jumps in liquidity conditions
b. Both markets experienced adverse jumps in both bid-ask spreads and quoted depth
c. Adverse liquidity jumps occurred in quoted depth for the Treasury market (but not materially in bid-ask spreads); however for BTP market the jumps occurred in bid-ask spreads (but not materially in depth)
d. The conclusions demonstrate that (i) electronic trading has not changed dynamics of market responses to imbalances in supply and demand, (ii) but has permanently changed the underlying economic mechanism of how liquidity risks unfold, and (iii) that the susceptibility to a sudden evaporation of liquidity depends almost entirely on the underlying market microstructure
705.3. In regard to the implications of electronification on fixed income markets and market quality, each of the following statements is true EXCEPT which is false?
a. Traditional gauges of liquidity conditions may be less suitable in the new market environment
b. Electronification in dealer-to-dealer platforms associates with a decline in the role of principal trading firms (PTFs) but a dramatic increase in the role of banks and broker-dealers
c. the drivers behind the electronification of fixed income markets have included each of (i) technological advances, (ii) changes in the demand for liquidity services, and (iii) regulatory reforms
d. In regard customer segments and platforms, the dealer-to-customer segment grew faster than either the dealer-to-customer or all-to-all segments; and platforms relying on request-for-quote (RFP) grew faster than central limit order book (CLOB) or click-to-trade (CTT)
Answers here:
