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Discussion Paper
Primary Dealer Participation in the Secondary U.S. Treasury Market
Keane, Frank M.; Schaumburg, Ernst; Fleming, Michael J. (2016-02-12)
The recent Joint Staff Report on October 15, 2014, exploring an episode of unprecedented volatility in the U.S. Treasury market, revealed that primary dealers no longer account for most trading volume on the interdealer brokerage (IDB) platforms. This shift is noteworthy because dealers contribute to long-term liquidity provision via their willingness to hold positions across days. However, a large share of Treasury security trading occurs elsewhere, in the dealer-to-customer (DtC) market. In this post, we show that primary dealers maintain a majority share of secondary market trading volume ...
Liberty Street Economics , Paper 20160212

Journal Article
Measuring treasury market liquidity
Fleming, Michael J. (2003-09)
This paper was presented at the conference "Economic Statistics: New Needs for the Twenty-First Century," cosponsored by the Federal Reserve Bank of New York, the Conference on Research in Income and Wealth, and the National Association for Business Economics, July 11, 2002. Securities liquidity is important to those who transact in markets, those who monitor market conditions, and those who analyze market developments. This article estimates and evaluates a comprehensive set of liquidity measures for the U.S. Treasury securities market. The author finds that the commonly used bid-ask ...
Economic Policy Review , Issue Sep , Pages 83-108

Report
Intraday market making with overnight inventory costs
Vogt, Erik; Fleming, Michael J.; Zhang, Hongzhong; Capponi, Agostino; Adrian, Tobias (2016-10-01)
The U.S. Treasury market is highly intermediated by nonbank principal trading ﬁrms (PTFs). Limited capital forces PTFs to end the trading day roughly ﬂat. We construct a continuous time market making model to analyze the trade-oﬀ faced by a proﬁt-maximizing ﬁrm with overnight inventory costs, and develop closed-form representations of the optimal price policy functions. Our model reveals that bid-ask spreads widen as the end of the trading day approaches, and that increases in order arrival rates do not always lead to higher price volatility. Our empirical analysis shows that ...
Staff Reports , Paper 799

Discussion Paper
How Does the Liquidity of New Treasury Securities Evolve?
Fleming, Michael J. (2020-08-26)
In a recent Liberty Street Economics post, we showed that the newly reintroduced 20-year bond trades less than other on-the-run Treasury securities and has similar liquidity to that of the more interest‑rate‑sensitive 30-year bond. Is it common for newly introduced securities to trade less and with higher transaction costs, and how does security trading behavior change over time? In this post, we look back at how liquidity evolved for earlier reintroductions of Treasury securities so as to gain insight into how liquidity might evolve for the new 20-year bond.
Liberty Street Economics , Paper 20200826

Discussion Paper
Price Impact of Trades and Orders in the U.S. Treasury Securities Market
Nguyen, Giang; Mizrach, Bruce; Fleming, Michael J. (2018-12-05)
It’s long been known that asset prices respond not only to public information, such as macroeconomic announcements, but also to private information revealed through trading. More recently, with the growth of high-frequency trading, academics have argued that limit orders—orders to buy or sell a security at a specific price or better—also contain information. In this post, we examine the information content of trades and limit orders in the U.S. Treasury securities market, following this paper, recently published in the Journal of Financial Markets and earlier as a New York Fed staff ...
Liberty Street Economics , Paper 20181205

Discussion Paper
Creditor Recovery in Lehman’s Bankruptcy
Sarkar, Asani; Denison, Erin; Fleming, Michael J. (2019-01-14)
Expectations of creditor recovery were low when the Lehman Brothers bankruptcy process started. On the day the firm filed for bankruptcy in September 2008, the average price of Lehman’s senior bonds implied a recovery rate of about 30 percent for senior creditors. A month later the bond price was implying a recovery rate of 9 percent, consistent with results from Lehman’s CDS auction. Two and a half years later, Lehman’s estate estimated that the recovery rate for holding company creditors would be just 16 percent. So, ten years after the filing, how much did creditors actually recover?
Liberty Street Economics , Paper 20190114a

Discussion Paper
What’s behind the March Spike in Treasury Fails?
Keane, Frank M.; Fleming, Michael J. (2016-04-18)
U.S. Treasury security settlement fails—whereby market participants are unable to make delivery of securities to complete transactions—spiked in March 2016 to their highest level since the financial crisis. As noted in this post, fails delay the settlement of transactions and can therefore lead to illiquidity, create operational risk, and increase counterparty credit risk. Fails in the Treasury market attract particular attention because of the market’s key role for global investors as a pricing benchmark, hedging instrument, and reserve asset. So what drove the March spike? In this ...
Liberty Street Economics , Paper 20160418

Discussion Paper
Breaking Down TRACE Volumes Further
Brain, Doug; De Pooter, Michiel; Dobrev, Dobrislav; Fleming, Michael J.; Johansson, Peter; Keane, Frank M.; Puglia, Michael; Rodrigues, Anthony P.; Shachar, Or (2018-11-29)
Following an earlier joint FEDS Note and Liberty Street Economics blog post that examined aggregate trading volume in the Treasury cash market across venues, this post looks at volume across security type, seasoned-ness (time since issuance), and maturity. The analysis, which again relies on transactions recorded in the Financial Industry Regulatory Authority's (FINRA) Trade Reporting and Compliance Engine (TRACE), sheds light on perceptions that some Treasury securities—in particular those that are off-the-run—may not trade very actively. We confirm that most trading volume is made up of ...
Liberty Street Economics , Paper 20181129

Report
An analysis of OTC interest rate derivatives transactions: implications for public reporting
Sarkar, Asani; Li, Ada; Fleming, Michael J.; Jackson, John; Zobel, Patricia (2012)
This paper examines the over-the-counter (OTC) interest rate derivatives (IRD) market in order to inform the design of post-trade price reporting. Our analysis uses a novel transaction-level data set to examine trading activity, the composition of market participants, levels of product standardization, and market-making behavior. We find that trading activity in the IRD market is dispersed across a broad array of product types, currency denominations, and maturities, leading to more than 10,500 observed unique product combinations. While a select group of standard instruments trade with ...
Staff Reports , Paper 557

Journal Article
The Term Securities Lending Facility: origin, design, and effects
Hrung, Warren B.; Keane, Frank M.; Fleming, Michael J. (2009-02)
The Federal Reserve launched the Term Securities Lending Facility (TSLF) in 2008 to promote liquidity in the funding markets and improve the operation of the broader financial markets. The facility increases the ability of dealers to obtain cash in the private market by enabling them to pledge securities temporarily as collateral for Treasuries, which are relatively easy to finance. The TSLF thus reduces the need for dealers to sell assets into illiquid markets as well as lessens the likelihood of a loss of confidence among lenders.
Current Issues in Economics and Finance , Volume 15 , Issue Feb

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