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Banks, Markets, and Liquidity

Paper Session

Saturday, Jan. 4, 2020 12:30 PM - 2:15 PM (PDT)

Manchester Grand Hyatt, Cortez Hill B
Hosted By: International Banking, Economics, and Finance Association
  • Chair: John C. Driscoll, Federal Reserve Board

Capital Regulation, Market-Making, and Liquidity

Rainer Haselmann
,
Goethe University and SAFE
Thomas Kick
,
Deutsche Bundesbank
Shikhar Singla
,
London Business School
Vikrant Vig
,
London Business School

Abstract

We investigate the impact of higher capital requirements on market-making activities of banks in bond markets. Based on a unique security transactions data of German banks, we exploit the 2011 EBA capital exercise as a quasi-natural experiment. Banks forced to increase capital hold lesser inventory, pre-arrange more trades, have smaller average trade size and provide lesser immediacy in corporate bond markets. We further document a reduction in aggregate corporate bond liquidity following the regulatory intervention. Our results suggest that higher capital requirements have undesired side effects in terms of lower secondary market liquidity.

Institutional Brokerage Networks: Facilitating Liquidity Provision

Vikram Nanda
,
University of Texas-Dallas
Munhee Han
,
University of Texas-Dallas
Sanghyun (Hugh) Kim
,
University of Texas-Dallas

Abstract

We argue that institutional brokerage networks facilitate liquidity provision and mitigate price impact of large non-information motivated trades. We use commission payments to map trading networks of mutual funds and brokers as affiliation networks. We find that central funds outperform peripheral funds, especially as measured by return gap. The outperformance is more pronounced when trading is primarily liquidity driven to accommodate large redemptions. This centrality premium is further strengthened by brokers' incentives to generate greater revenues and by repeated interactions between brokers and funds. By merging daily transactions with quarterly holdings, we confirm that the centrality premium is indeed driven by reduced trading costs, rather than higher interim (intra-quarter) trading performance or profitable information flows from the brokers.

Insider Trading Under the Microscope

Andriy Shkilko
,
Wilfrid Laurier University

Abstract

Informed agents play a central role in price formation in financial markets. Theory models offer a variety of predictions on the behavior of such agents; from aggressive and therefore quickly revealing, to stealthy and largely undetectable. I examine these predictions using a comprehensive intraday dataset that contains all orders and trades of a prominent group of privately informed agents -- company insiders. When trading on price-relevant information, insiders usually submit large liquidity-demanding orders, and prices adjust quickly. Consistent with theory, insider aggressiveness is attributable to competition, trading urgency, and the value of information. Back-running by other market participants further increases the speed of price adjustment.
Discussant(s)
Ran Duchin
,
University of Washington
Iman van Lelyveld
,
Central Bank of the Netherlands
Jeff Coles
,
University of Utah
JEL Classifications
  • C6 - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling
  • L1 - Market Structure, Firm Strategy, and Market Performance