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Macro news, risk-free rates, and the intermediary: customer orders for thirty-year Treasury futures
Menkveld, Albert J.; Sarkar, Asani; Van der Wel, Michel (2007)
Customer order flow correlates with permanent price changes in equity and non-equity markets. We examine macro news events in the thirty-year Treasury futures market to identify causality from customer flow to risk-free rates. We remove the positive feedback trading effect and establish that, in the fifteen minutes subsequent to the news, intermediaries rely on customer orders to determine a substantial part of the announcement?s effect on risk-free rates?about one-third relative to the instantaneous effect. Intermediaries appear to benefit from privately observing informed customers, since ...
Staff Reports , Paper 307

Discussion Paper
Which Dealers Borrowed from the Fed’s Lender-of-Last-Resort Facilities?
Sarkar, Asani; Hrung, Warren B.; Fleming, Michael J.; Acharya, Viral V. (2017-05-10)
During the 2007-08 financial crisis, the Fed established lending facilities designed to improve market functioning by providing liquidity to nondepository financial institutions—the first lending targeted to this group since the 1930s. What was the financial condition of the dealers that borrowed from these facilities? Were they healthy institutions behaving opportunistically or were they genuinely distressed? In published research, we find that dealers in a weaker financial condition were more likely to participate than healthier ones and tended to borrow more. Our findings reinforce the ...
Liberty Street Economics , Paper 20170510

Report
Dealers and the Dealer of Last Resort: Evidence from MBS Markets in the COVID-19 Crisis
Sarkar, Asani; Song, Zhaogang; Chen, Jiakai; Liu, Haoyang (2020-07-01)
We study price dislocations and liquidity provision by dealers and the Federal Reserve (Fed) as the “dealer of last resort” in agency MBS markets during the COVID-19 crisis. As customers sold MBS to “scramble for cash,” dealers provided liquidity by taking inventory in the cash market and hedging inventory risk in the forward market. The cash and forward prices diverged significantly beyond the difference in the quality of MBS traded on the two markets. The Fed first facilitated dealers’ inventory hedging and then took holdings off dealers’ inventory directly. The price ...
Staff Reports , Paper 933

Report
Can competition between brokers mitigate agency conflicts with their customers?
Sarkar, Asani; Chakravarty, Sugato (1997)
We study competitive, but strategic, brokers executing trades for an informed trader in a multi-period setting. The brokers can choose to (a) execute the order, as agents, first, and trade for themselves, as dealers, afterwards; or (b) trade for themselves first and execute the order later. We show that the equilibrium outcome depends on the number of brokers. When the number of brokers exceeds a critical number (greater than one), the informed trader distributes his order (equally) among the available brokers. The brokers, in turn, execute the informed trader's order first and trade personal ...
Staff Reports , Paper 25

Discussion Paper
Who Benefited from PPP Loans by Fintech Lenders?
Godin, Nathan Y.; Battisto, Jessica; Sarkar, Asani; Kramer, Claire (2021-05-27)
In the previous post, we discussed inequalities in access to credit from the Paycheck Protection Program (PPP), showing that, although fintech lenders had a small share of total PPP loan volumes, they provided important support for underserved borrowers. In this post, we ask whether smaller firms received the amount of PPP credit that they requested, and whether loans went to the hardest-hit areas and mitigated job losses. Our results indicate that fintech providers were a key channel in reaching minority-owned firms, the smallest of small businesses, and borrowers most affected by the ...
Liberty Street Economics , Paper 20210527c

Discussion Paper
How Much Value Was Destroyed by the Lehman Bankruptcy?
Sarkar, Asani; Denison, Erin; Fleming, Michael J. (2019-01-14)
Lehman Brothers Holdings Inc. (LBHI) filed for Chapter 11 bankruptcy protection on September 15, 2008, initiating one of the largest and most complex bankruptcy proceedings in history. Recovery prospects for creditors, who submitted about $1.2 trillion of claims against the Lehman estate, were quite bleak. This week, we will publish a series of four posts that provide an assessment of the value lost to Lehman, its creditors, and other stakeholders now that the bankruptcy proceedings are winding down. Where appropriate, we also consider the liquidation of Lehman?s investment banking affiliate, ...
Liberty Street Economics , Paper 20190114b

Discussion Paper
Did Dealers Fail to Make Markets during the Pandemic?
Sarkar, Asani; Song, Zhaogang; Rubio, David; Chen, Jiakai; Liu, Haoyang (2021-03-24)
In March 2020, as the COVID-19 pandemic disrupted a range of financial markets, the ability of dealers to maintain liquid conditions in these markets was questioned. Reflecting these concerns, authorities took numerous steps, including providing regulatory relief to dealers. In this post, we examine liquidity provision by dealers in several financial markets during the pandemic: how much was provided, possible causes of any shortfalls, and the effects of the Federal Reserve’s actions.
Liberty Street Economics , Paper 20210324

Report
Estimating the adverse selection and fixed costs of trading in markets with multiple informed traders
Sarkar, Asani; Wu, Lifan; Chakravarty, Sugato (1998)
We investigate, both theoretically and empirically, the relation between the adverse selection and fixed costs of trading and the number of informed traders in a financial asset. As a proxy for informed traders, we use dual traders -- i.e., futures floor traders who execute trades both for their own and customers' accounts on the same day. Our theoretical model shows that dual traders optimally mimic the size and direction of their informed customers' trades. Further, the adverse selection (fixed) costs of trading: (1) decrease (increase) with the number of dual traders m, if dual traders are ...
Research Paper , Paper 9814

Discussion Paper
Is There Discount Window Stigma in the United Kingdom?
Sarkar, Asani; Lee, Helene (2016-09-12)
At the onset of the financial crisis in the summer of 2007, news that Barclays had borrowed from the Bank of England (BoE) received wide media coverage. This information triggered concerns that the BoE's lending facility may have become stigmatized, prompting market participants to interpret borrowing from the BoE as a sign of financial weakness. If such stigma discouraged borrowing, of course, it would defeat the purpose of the facility. We review the history of the BoE's lending facilities and experiences with stigma, both historically and in the recent period. We also compare the BoE's and ...
Liberty Street Economics , Paper 20160912

Discussion Paper
Tailoring Regulations
Reubenstein, Rebecca; Sarkar, Asani (2021-07-12)
Regulations are not written in stone. The benefits derived from them, along with the costs of compliance for affected institutions and of enforcement for regulators, are likely to evolve. When this happens, regulators may seek to modify the regulations to better suit the specific risk profiles of regulated entities. In this post, we consider the Economic Growth, Regulatory Relief, and Consumer Protection Act (EGRRCPA) passed by Congress in 2018, which eased banking regulations for smaller institutions. We focus on one regulation—the Liquidity Coverage Ratio (LCR)—and assess how its ...
Liberty Street Economics , Paper 20210712

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