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SPEECH

Market Structure and Liquidity in the U.S. Treasury and Agency Mortgage-Backed Security
(MBS) Markets
May 17, 2016
Nathaniel Wuerffel, Senior Vice President
Remarks at the Mortgage Bankers Association National Secondary Market Conference and Expo, New York City
As prepared for delivery

Good morning, it is a pleasure to speak before the Mortgage Bankers Association today on the topic of market structure and
liquidity. Please note that my remarks reflect my personal views on these topics and not necessarily the views of the Federal
Reserve Bank of New York or the Federal Reserve System.1
Fixed income market liquidity has garnered substantial attention from market participants, the media, and policymakers in recent
years. There has been a notable amount of market commentary suggesting deterioration in liquidity, yet it has been difficult to find
compelling evidence for this in many traditional indicators used to measure liquidity. Why might this be the case? Market liquidity
is central to the functioning of financial markets, and a sustained examination of this topic should remain a priority for private
market participants as well as the public sector.
Today I'd like to focus on the interaction of liquidity and market structure in the Treasury and agency MBS markets as offering
some important insight into this question. We should expect liquidity conditions to be dynamic, changing as the structure of
markets change, including the instruments, participants, practices and policies that impact trading across financial markets. The
Treasury and agency MBS markets in particular have each been undergoing significant structural changes that have implications
for the way that we measure and interpret liquidity conditions now and in the future. Indeed, market structure changes may help
explain why the market narrative on liquidity at times appears to diverge from some of the traditional measures.
What are the linkages between liquidity and market structure in the Treasury and agency MBS markets?
The Treasury and agency MBS markets represent the largest, most liquid government securities markets in the world. The
Treasury market comprises over $13 trillion in marketable securities, while the amount of outstanding agency MBS is nearing $6
trillion. About $500 billion in Treasuries trade hands every day, and agency MBS volumes represent another $200 billion in daily
trading.2
This immense liquidity is important for the health of financial markets and the economy. Liquidity in the Treasury market is
essential to the market's vital role in global financial markets, lowering financing costs to the U.S. government, contributing to the
market's use as a risk free benchmark, and allowing Treasury securities to serve as an important store of value and means of
managing risk for investors. In the mortgage market, a well-functioning secondary market allows mortgage market participants to
manage their risk, and helps lower the cost of home ownership. For the Federal Reserve, these markets are important because of
their role in the implementation of monetary policy. We conduct open market operations that rely on and interact with liquidity in
these markets, like the large scale asset purchases and reinvestments. We also analyze these markets to help understand monetary
policy expectations, and how financial conditions and structure are changing.
How did these markets become so liquid and vital? Were their structures determined by historical accident, or was it by clever
design? A number of scholars and analysts have studied these markets in depth, including the evolution of their instruments,
participants, practices and policies—all elements of what I will define as being "market structure."3 I won't be able to do justice to
their work in this discussion. But suffice it to say that historical evolution, innovation, and important private- and public-sector
policy choices along the way have shaped these markets in ways that help them serve the public and private sectors very well.
On the policy side, decades ago Treasury developed the practice of prioritizing a 'regular and predictable' approach to holding
auctions, a change which helped develop secondary market liquidity across the curve of maturities, and is widely credited with
reducing uncertainty and minimizing government borrowing costs.4
The Treasury market has been undergoing rapid change in the last decade, as explored in detail in a Joint Staff Report on the
events of October 15, 2014, when the Treasury market experienced what is sometimes called a "flash rally."5 For example, the
interdealer market has evolved into high speed electronic central limit order books, or CLOBs, that play a key role in Treasury
market price discovery. As it has in equities, futures and foreign exchange markets, the shift towards electronic and automated

trading has reduced the costs of trading and enhanced many dimensions of liquidity by enabling a greater number of market
participants to trade in a more efficient manner.6
The agency MBS market traces its roots back to 1970 when the first Ginnie Mae mortgage-backed security was issued. By pooling
several loans into a tradable security, and guaranteeing the timely receipt of principal and interest, Ginnie Mae created a tradable
mortgage instrument that was attractive to a wide variety of global investors. Soon afterwards, the development of the To-BeAnnounced (TBA) market allowed for fungible forward-trading of what is today millions of otherwise less liquid individual
securities. Roughly 90 percent of the of agency MBS trading occurs in the TBA market, making it the second most actively traded
fixed income market behind Treasuries in the United States. The combination of the agency guarantee and the TBA market
structure has been estimated to lower mortgage rates by as much as 50 basis points and this benefit can be higher during periods
of stress.7
Frictions and risks in these markets can also highlight the importance of market structure. For example, when interest rates fell
close to zero around the time of the financial crisis, the Treasury and agency MBS markets experienced heightened levels of
settlement fails. In response, the Treasury Market Practices Group (TMPG)—a private sector group of market professionals
dedicated to the integrity and efficiency of the Treasury, agency debt and agency MBS markets—responded by recommending a
charge for fails in the Treasury market and later the agency debt and MBS markets.8 These charges led to a sharp reduction of fails
and improvement in market functioning.9 A few years later, the TMPG took steps to improve market functioning by
recommending margining for forward-settling agency MBS transactions.10 The TMPG's efforts have removed obstacles that would
otherwise undermine market functioning, and helped identify practices that have improved the integrity and liquidity of these
markets.
Whether policy choices, or the innovation of practices and technology, these developments provide us with insights into the
relationship between liquidity outcomes and characteristics of market structure. For example, it appears that liquidity is generally
enhanced where trading:
• is concentrated in a limited number of instruments with a high degree of standardization;
• involves a large and diverse group of participants;
• uses common and efficient trading practices, frequently that are electronic; and
• is guided by private- and public-sector policies that contribute to the integrity and efficiency of markets.
Where these conditions exist, liquidity tends to be higher on average: trading is faster and less costly, depth is greater and prices
are more efficient. When they do not exist, liquidity tends to be lower: trading is slower and more expensive, with less depth and
efficiency.
Why do market structure changes make understanding liquidity in these markets challenging?
Let me start by laying out a definition of liquidity.
Liquidity can be a fairly abstract concept and there are numerous ways to define and measure it. The definition I prefer is this:
Market liquidity is the cost of quickly converting a desired quantity of an asset into cash (or cash into an asset) at an efficient
price.
The definition incorporates four components. First, cost. What is the transaction cost of executing a trade? Second is timeliness.
How quickly can you get in or out of a position? Third is depth. What quantity can be bought or sold at a given price? And finally,
efficiency. Are trades conducted at efficient prices?
Price efficiency is not usually included in the definition of liquidity, but the concept seems quite important, especially in a world of
high-speed electronic markets and a higher incidence of "flash" events. Low transaction cost and quick execution may mean little if
the price at which a transaction is conducted is at a level that defies common sense or is obviously artificial.11 A number of flash
events in different asset classes provide recent examples of this concern, including the equity markets in May of 2010, the Treasury
market in October of 2014, and foreign exchange markets in March of 2015. In each of these cases, there was no new information
that could have changed the value of these assets so dramatically, especially in such a rapid fashion, but nevertheless the stocks of
some healthy companies traded briefly at pennies, major foreign exchange pairs whipsawed, and the prices of the world's
preeminent risk-free assets experienced historic moves, including an unprecedented 16 basis-point round-trip in the 10-year
Treasury security that spanned just a few minutes amidst the fourth-largest intraday trading range in close to two decades. During
each of the events, trading volume surged, market depth fell, and realized volatility spiked, as market participants seeking to
manage their exposures and liquidity risk amplified price movements.12 Despite these signs of illiquidity, in flash events bid-ask
spreads often remain narrow, and price movements can be fairly continuous.13
Flash events thus might be characterized as a modern form of illiquidity in which transactions in highly automated markets may
still take place quickly—sometimes on the order of microseconds—and even at narrow bid-offer spreads, and yet broader liquidity

conditions deteriorate significantly, with buyers and sellers no longer transacting at efficient prices. Notably, while traditional
market makers report that days like October 15, 2014 are highly unusual, many firms employing high-speed automated trading
report that such days do not necessarily require them to adjust their algorithms, and they may even see the events as relatively
slow-moving. These divergent perspectives and the increased incidence of flash events across markets might foreshadow an
increase in market liquidity "jump" risk—the risk of a sudden and large jump in prices or volatility—a concern for which there is
some evidence.14 More work must obviously be done to better understand the financial stability risks associated with flash events.
Given the multidimensional nature of liquidity that I've just described, quantifying liquidity can be challenging, but there are a
number of measures market participants use to monitor dimensions of market liquidity over time. In the Treasury market,
analysts frequently look at measures like bid-ask spreads to discern the cost of trading, which is often supplemented with other
measures, like order book depth and price impact measures, that evaluate how trade sizes and price changes are related. To gauge
market efficiency, market participants often use measures like yield curve fitting errors, which measure the dispersion of traded
yields around a smoothed yield curve. Overall, measures of liquidity in the Treasury market appear to paint a somewhat mixed,
albeit largely positive, picture of market liquidity, with bid-ask spreads stable and price impact well within historical ranges. Some
measures, including yield curve fitting errors, show some deterioration in recent years, but with levels near longer-run averages
(Exhibits 1-3).15
For mortgage-backed securities, some cost metrics like quoted bid-ask spreads are less useful because they come from dealer-tocustomer platforms and capture only the likely, or "indicative," price at which a transaction might occur. As a result, analysts focus
on measures of activity such as trading volume, trade size and turnover rate in addition to derived bid-ask spreads based on actual
transaction prices and other indicators, such as price impact. Like the Treasury market, most measures of liquidity conditions
have declined somewhat in recent years, but levels are at or near long run averages. For example, average trading volume and
average trade size have each declined from the high levels witnessed just before and after the crisis, but are consistent with levels
seen in the early part of last decade, while measures of bid-ask spreads and price impact suggest that liquidity conditions are
relatively stable (Exhibits 4-6).16
Despite this relatively benign backdrop, market participants have consistently described liquidity conditions as increasingly
challenged, with many quick to point out that traditional measures of liquidity may not be indicative of actual trading conditions.
Traditional liquidity metrics only capture trades that have taken place, but do not capture the immediacy with which participants
were able to trade, or if they were able to trade at all. Furthermore, firms report having had to change their market making
operations in response to liquidity conditions, with many pointing out that they can no longer trade in the size that they have in
the past without impacting market prices.
So if liquidity conditions seem to have changed, why is it not obvious in traditional measures?
Changing market structure provides at least some insight to this question. Structural changes mean that our interpretation of
some liquidity measures must adapt, and that we may also need to search for new ways to measure liquidity. In other words, both
the interpretation and measurement of liquidity must evolve as market structure evolves. To illustrate this point, I'd like to
describe three important ongoing changes in fixed income market structure that help us reconcile aspects of the narrative around
liquidity and what we see in the data. These include: (1) electronic and automated trading; (2) bank regulation and risk
management; and (3) evolving public sector ownership.
Electronic and Automated Trading
I mentioned earlier that bid-ask spreads in Treasury markets have been low and stable in recent years, which most would interpret
as a positive indicator for liquidity. But it is no longer clear that we can take a strong signal about liquidity from bid-ask spreads in
the interdealer Treasury market. The growth of high-speed automated market making in interdealer Treasury markets has
dampened variation in this measure as firms employing these strategies tend to provide narrow bid-ask spreads, even during
volatile times and "flash" events. However, high speed market makers often respond to instances of elevated volatility by rapidly
reducing the quantity they are willing to buy or sell at a given price, resulting in lower market depth, suggesting that measures that
incorporate depth and its volatility may prove more important in highly automated markets. Some refer to this aspect of liquidity
as creating a "liquidity illusion" or "phantom liquidity," as it can disappear suddenly. On October 15, 2014, as noted in the Joint
Staff Report, bid-ask spreads moved very little throughout the day, but market depth was volatile and dropped to very low levels
just before the round-trip in prices (Exhibits 7 and 8).
It's also the case that bid-ask spreads are very much dependent upon the market in which they are measured. The interdealer
market, which trades using CLOBs, may not reflect the bid-ask spreads borne by participants in request-for-quote (RFQ) markets
like the dealer-to-customer Treasury and MBS markets. In dealer-to-customer environments, which represent about half of the
Treasury market and an even greater share for MBS, we have relatively poor insight into actual bid-ask spreads, because as I
mentioned, observed spreads are indicative.17 In MBS, one can use data from TRACE to construct estimates of effective bid-ask
spread measures based on actual trades.

But in Treasuries it is particularly difficult to measure market liquidity in the dealer-to-customer market, because of the lack of
nearly any publicly or commercially available trade data. Treasury market data collected after the Joint Staff Report suggests that
the liquidity experienced in dealer-to-client markets may be different than that in highly automated markets. For example, during
the most volatile period of October 15, 2014, the non-response rate to client trade inquiries rose to over 30 percent from its normal
level of around 5 percent for the 10-year security (Exhibit 9). The spread between prices in the dealer-to-client and interdealer
markets also widened during the volatility (Exhibit 10). More data would be necessary to understand these dynamics, suggesting
that data collection and public reporting of the kind that is done in the MBS market may have value in the Treasury market as
well.18
Bank Regulation and Risk Management
The second trend I'd like to highlight is adaptation to the post-crisis regulatory environment and ongoing risk management
changes. These trends have been widely discussed by market participants, the media, and regulators, with frequent references to
the shrinking amount of dealer balance sheet allocated to capital markets business lines that rely on trading inventories and repo,
both of which have declined (Exhibits 11 and 12).
How do these trends relate to market liquidity? Many market participants have pointed to recent changes in fixed income relative
value relationships, particularly those measuring the relative pricing of cash securities versus synthetic products, or derivatives,
which receive different balance sheet treatment under current regulation. Since the middle of last year, swap spreads, or the
difference between swap rates and Treasury yields, have declined and even gone negative, or dipped further into negative territory,
for longer tenor rates (Exhibit 13). Over the same time frame, relative value relationships between cash Treasury securities and
Treasury futures have experienced similar volatility.
A common theme among these anomalies is the influence of the rise in the cost of funding cash as compared to derivatives
instruments. Market participants have pointed to constraints on dealers' repo financing of Treasuries as contributing to these
trends, as such constraints increase the cost of establishing and funding positions in cash securities relative to swaps and futures.
In the agency MBS market, dollar roll implied financing rates for securities currently being produced ("production coupons") have
increased to multi-year highs, and in some cases exceed agency MBS term repo. Similar to the dynamics affecting the Treasury
market, MBS participants cite constraints related to dealer balance sheets as driving implied financing rates above MBS repo rates.
While these developments are difficult to directly tie to overall market liquidity, changes in funding costs and funding market
liquidity almost certainly will have an effect on secondary market liquidity in cash securities. Dealer balance sheets play a central
role in the functioning of funding markets, which in turn are important to enable intermediation and arbitrage in financial
markets more broadly.19 Importantly, while many market participants have pointed to regulation as driving these changes, dealer
balance sheet adjustments have also been influenced by private decisions to manage risk more prudently after the financial
crisis.20
Of course, a thoughtful examination of these recent developments would weigh their costs and benefits, including the cost of
potentially lower liquidity and the benefit of greater financial stability from the regulatory and risk management changes. Some
increase in the price of liquidity or in market liquidity "jump" risk may be worth reducing the likelihood of the collapse of a major
financial institution, which could set off sharp dislocations across markets. A cost-benefit analysis of this kind is complex, because
it is unlikely that we have reached a new equilibrium: not all changes in the regulatory landscape have yet been implemented, and
market participants are already adapting and finding new ways of providing liquidity. Moreover, we do not yet have robust ways of
measuring some aspects of the costs, including the risk or implications associated with a potential increase in flash events or
liquidity "jump" risk. It is clear that any analysis will require a deep understanding of the specific ways in which these structural
changes affect liquidity and financial stability risk.
Public Sector Ownership
The third development I'd like to discuss is the evolution of public sector ownership in these markets and the possible implications
for liquidity. Following the large scale asset purchase programs implemented during the global financial crisis and in the years
after, the Fed's System Open Market Account (SOMA) portfolio now holds nearly $2.5 trillion of Treasuries and over $1.7 trillion
of agency MBS.
Given their large size, Fed purchases or holdings have the potential to increase or decrease liquidity in these markets, and market
functioning considerations have informed the implementation of purchase operations. As one example, implementation of the
purchases in Treasuries took into account relative value, and our purchases provided reliable demand for less liquid off-the-run
securities.21 These factors may have helped suppress price inefficiencies in the cash market, as measured by yield curve errors.
Thus some deterioration in this metric after we ceased secondary market purchases might be expected.
With respect to agency MBS, the Fed is now the largest single holder, owning roughly 30 percent of the outstanding stock. The vast
majority of purchases during the purchase programs were made in newly-issued MBS traded in the TBA market, as are all of the

reinvestment related purchases we conduct today. Purchasing in the TBA market is both an efficient way to execute such sizeable
transactions, and also helps avoid liquidity strains that could emerge if purchases were made in less liquid coupons.22
Because Fed purchases or holdings have the potential to create scarcity in the assets being purchased, in both the Treasury and
agency MBS markets we employ operations designed to help support the liquidity of these markets. These include lending our
Treasury holdings and conducting dollar rolls to facilitate the settlement of our agency MBS purchases.
Contemporaneous with the Fed increasing its agency MBS holdings, Fannie Mae and Freddie Mac were mandated by the FHFA to
wind down their retained portfolios, a move that reduced their portfolio management and hedging activities in the market.
Commercial banks, the second largest owner of MBS behind the Fed, have also reduced these activities in response new capital
requirements and accounting rules, which have contributed to an increase in their allocation of holdings to passive held-tomaturity (HTM) accounts. As a result, the ownership base in the MBS market has shifted meaningfully since the crisis from those
who hedge the negative convexity inherent in MBS to those that do not. How this affects liquidity is difficult to determine though
there are a few hypotheses. Some analysts speculate that the narrowing of swap spreads is at least partially related to this, because
active hedgers frequently use swaps as a means to hedge interest rate risk of their portfolio. Others believe this phenomenon has
driven average trading volumes lower, all else equal. Lastly, the shift in the ownership base from those who hedge duration, to
those who do not, likely mutes the impact of negative convexity events witnessed during times of heightened interest rate
volatility, whereby hedgers need to sell in a declining market and purchase in a rising market.23
Looking ahead, Some Current Public Sector Initiatives
Lastly, I'd like to cast attention on some forward looking public policy initiatives at the heart of the debate around market
structure and liquidity in the MBS and Treasury markets.
In Treasuries, the steps identified in the Joint Staff Report on October 15, 2014 represent the most comprehensive evaluation of
the market’s structure in a quarter century. As part of the follow up from that work, the Treasury Department earlier this year
issued a request for information (RFI) on the evolving structure of the Treasury market, recognizing the importance of improved
official sector access to data across all areas of market activity.24 The information from the October 15 report and the RFI provide
important insights for the policies that will help shape the future structure of the Treasury market. For example, a consensus has
already emerged for a greater need for official sector access to transaction data, and just yesterday the Treasury and the SEC
announced that they are working together to explore means of collecting cash market transaction information, working with
FINRA.
In MBS, the TBA market is about to go through its greatest structural change since it was introduced nearly 50 years ago, with the
Common Securitization Platform (CSP), a new infrastructure that will harmonize Fannie Mae and Freddie Mac's single-family
mortgage securitization activities, and enable them to eventually issue a Single Security.25 The Single Security TBA contract,
recently dubbed Uniform MBS (UMBS), will allow either Fannie Mae or Freddie Mac securities to be delivered into a single
contract.
Roughly eight years after the start of the financial crisis, continuing steps to change the structure of the mortgage market seems
important, lest this market's depth and liquidity be diminished over time. For many years, Freddie Mac securities have been less
liquid than their Fannie Mae peers, and market participants have suggested that there are sizeable taxpayer costs associated with
maintaining separate securitization platforms for both entities.26 Commentary on the planned Single Security has highlighted the
lessons I mentioned earlier around market structure and liquidity: in order to improve liquidity, the initiative must help create a
deep pool of standardized instruments, continue to attract a large and diverse group of investors, employ common securitization
and trading mechanisms, and be guided by policy that is informed and led by the collaboration of the public and private sectors.
These ongoing initiatives and others build on a long history of dynamic change in the structure and liquidity of Treasury and
agency MBS markets and will continue to shape their evolution in the years to come. In the process, we should be mindful to
regularly reassess our interpretation and measurement of liquidity so that we understand and continue to support this critical
attribute of the Treasury and agency MBS markets.
Exhibits

1

George Eckerd and Brian Greene assisted in preparing these remarks, along with contributions from Tobias Adrian, Alain
Chaboud, Michael Fleming, Frank Keane, Michael McMorrow, Brett Rose and Ernst Schaumburg, helpful comments from a
number of others, and assistance with data from Romen Mookerjee and Rich Podjasek.
2

Treasury market trading volumes can be challenging to estimate due to the lack of comprehensive data on activity across dealerto-client and interdealer markets, see Fleming, Keane, Schaumburg (2016) Primary Dealer Participation in the Secondary U.S.
Treasury Market, Liberty Street Economics Blog, February 9. MBS volumes are obtained from transaction data reported by
members of the Financial Industry Regulatory Authority (FINRA) to the Trade Reporting and Compliance Engine (TRACE).

3

See for example: Fleming, Mizrach, Nguyen (2009) “The Microstructure of a U.S. Treasury ECN: The BrokerTec Platform”;
Grossman and Miller (1988) “Liquidity and Market Structure”; O’Hara (2015) “High Frequency Market Microstructure”; Garbade,
Keane, Logan, Stokes, and Wolgemuth (2010) “The Introduction of the TMPG Fails Charge for U.S. Treasury Securities.”
4

See Garbade (2007) “The Emergence of “Regular and Predictable” as a Treasury Debt Management Strategy,” FRBNY Economic
Policy Review, for background and analysis of the evolution of Treasury auction practices.
5

See Joint Staff Report: The U.S. Treasury Market on October 15, 2014 (JSR). Though the JSR does not specify, the contributors
to the report from the Federal Reserve System included: Alain Chaboud, Dobrislav Dobrev, Michael Fleming, Frank Keane,
Michael McMorrow, Suraj Prasanna, Ernst Schaumburg and Nathaniel Wuerffel, with assistance from Nashrah Ahmed, Joseph
Fiorica and Ron Yang. The report was prepared in close collaboration with staff at the Department of the Treasury, the U.S.
Securities and Exchange Commission, and the Commodity Futures Trading Commission.
6

See Mizrach, Bruce and Christopher J Neely(2006) “The Transition to Electronic Communications Networks in the Secondary
Treasury Market,” Federal Reserve Bank of St. Louis Review for a discussion of the transition to electronic trading and its effects
across markets.
7

One study by Federal Reserve staff found that the TBA mechanism reduces borrowing costs by 9 to 12 basis points, on average,
with the benefit increasing substantially during periods of stress to as many as 65 basis points; see Vickery and Wright (2013) TBA
Trading and Liquidity in the Agency MBS Market, FRBNY Economic Policy Review. Another study estimated that the GSE
guarantee reduced borrowing costs by 32-33 basis points. See Passmore (2005) “The GSE Implicit Subsidy and Value of
Government Ambiguity”
8

See the TMPG best practices page for the latest information on a wide range of market structure issues handled by the group.

9

See Fleming (2012) Failure is No Longer a (Free) Option for Agency Debt and Mortgage-Backed Securities, Liberty Street
Economics Blog, for further discussion of TMPG’s fails charge recommendation in the mortgage market.
10

See Margining in Agency MBS Trading, Treasury Market Practices Group, November 2012, for further information.

11

Though definitions vary, an efficient price can generally be thought of as one that reflects the consensus valuation of an asset,
incorporating all publicly available information. Research on market efficiency (see for example Abreu and Brunnermeier (2003)
“Bubbles and Crashes” and Fama (1965) “The Behavior of Stock Market Prices” for perspectives on market efficiency) often
explores the relative inefficiency, or mispricing, of assets within or across markets, not unlike the arbitrage opportunities that
might exist along a yield curve. It would appear that in flash events, relative mispricing across instruments or markets may be little
changed, and yet the market as a whole may become inefficient, no longer correctly reflecting available information. These
conditions might help explain why, for example, firms employing high-speed arbitrage strategies reported that their algorithms
operated within normal tolerances on October 15, 2014.
12

For example, as noted in the JSR, short interest rate and volatility (or “gamma”) positions likely amplified the moves on October
15, 2014 as market participants sought to dynamically hedge their exposures.
13

See Schaumburg and Yang (2015) Liquidity During Flash Events, Liberty Street Economics Blog, August 18, for further analysis
of flash events in the Treasury, foreign exchange, and equity markets.
14

See Adrian, Fleming, Vogt (October 2015) “A Note on Measuring Liquidity Jumps” and Adrian, Stackman, Fleming, and Vogt
(2015) Has Liquidity Risk in the Treasury and Equity Markets Increased?, Liberty Street Economics Blog, October 6, for
discussion of the potential rise in liquidity risk.
15

See Adrian, Fleming, Stackman, Vogt (2015) Has U.S. Treasury Market Liquidity Deteriorated?, Liberty Street Economics Blog,
August 17, the first of a series of posts on Treasury market liquidity.
16

See Podjasek, Molloy, Fleming, Fuster (2016) Has MBS Market Liquidity Deteriorated?, Liberty Street Economics Blog,
February 8, for background on the structure and liquidity of the agency MBS market.
17

See Fleming, Keane, Schaumburg (2016) Primary Dealer Participation in the Secondary U.S. Treasury Market, Liberty Street
Economics Blog, February 12, for a breakdown of volumes in the Treasury market by segment.
18

Another byproduct of increased automated trading is smaller average trade sizes in the interdealer broker and futures markets.
When trading on CLOBs, participants tend to break large orders into smaller-sized trades. In the interdealer broker and futures
Treasury markets, average trade size has fallen markedly over the past 10-years, coinciding with the growth of automated trading.
While some associate smaller average trade sizes with lower liquidity, given these structural changes it is not clear that the
interpretation is so straightforward. It is possible that small trades can be executed even more easily in highly automated markets,
whereas it may be more difficult to execute large trades.

19

See Adrian, Begalle, Copeland, Martin (2011) Repo and Securities Lending, Federal Reserve Staff Report, and Copeland, Davis,
LeSueur, Martin (2012) Mapping and Sizing the U.S. Repo Market, Liberty Street Economics Blog,for a discussion of the repo
market's structure and size.
20

See Adrian, Fleming, Goldberg, Lewis, Natalucci, Wu (2013) Dealer Balance Sheet Capacity and Market Liquidity during the
2013 Selloff in Fixed-Income Markets, Liberty Street Economics Blog, for analysis on the drivers of dealer positioning and risk
metrics.
21

See Gagnon, Raskin, Remache, Sack (2010) “Large-Scale Asset Purchases by the Federal Reserve: Did They Work?” FRBNY
Staff Report, which provides information on the implementation and effects of the Fed’s asset purchase programs.
22

See remarks by Simon Potter The Implementation of Current Asset Purchases, March 2013, for further details on the effects of
asset purchases on the MBS market, including market functioning considerations.
23

See Malz, Schaumberg, Shimonov, Strzodka (2014) Convexity Event Risks in a Rising Interest Rate Environment, Liberty Street
Economics Blog, for analysis on reduced MBS hedging needs
24

See U.S. Department of Treasury, Notice Seeking Public Comment on the Evolution of the Treasury Market Structure, January
2016, for details on the RFI.
25
26

See the Common Securitization Platform by the FHFA for details on the reform.

See for example The Mortgage Banker Associations response to the FHFA's request and Charting the Course to a Single Security
by Lorie Goodman and Lewis Ranieri for information regarding the Single Security.