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Market-making and proprietary trading: industry trends, drivers and policy implications

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  • Bank for International Settlements

Abstract

Market-makers serve a crucial role in financial markets by providing liquidity to facilitate market efficiency and functioning. This report - prepared by a Study Group chaired by Denis Beau (Bank of France) - assesses changes in the supply of and demand for market-making services as well as their potential impact on fixed income markets. These markets are of particular interest to policymakers, given their relevance to monetary policy and financial stability. The Study Group identifies signs of increased liquidity bifurcation and fragility, with market activity concentrating in the most liquid instruments and deteriorating in the less liquid ones. Drivers are both conjunctural and structural in nature. While it remains difficult at this stage to provide a definitive overall assessment, it seems likely that the compressed pricing of immediacy services observed in the past will give way to liquidity premia more consistent with actual market-making capacity and costs. Several supporting initiatives, such as strengthening liquidity risk management, improving market transparency and monitoring or adjusting incentive schemes for market-makers, would help making this outcome more likely and would support the robustness of market liquidity. Regular liquidity-providing activities by central banks, in turn, can provide an important backstop. Considering other, more direct measures by central banks to support market functioning, however, involves several difficult cost-benefit trade-offs.

Suggested Citation

  • Bank for International Settlements, 2014. "Market-making and proprietary trading: industry trends, drivers and policy implications," CGFS Papers, Bank for International Settlements, number 52.
    • Handle: RePEc:bis:biscgf:52
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    References listed on IDEAS

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    1. Tetsuo Kurosaki & Yusuke Kumano & Kota Okabe & Teppei Nagano, 2015. "Liquidity in JGB Markets: An Evaluation from Transaction Data," Bank of Japan Working Paper Series 15-E-2, Bank of Japan.
    2. Antoine Bouveret & Martin Haferkorn & Gaetano Marseglia & Onofrio Panzarino, 2022. "Flash crashes on sovereign bond markets – EU evidence," Mercati, infrastrutture, sistemi di pagamento (Markets, Infrastructures, Payment Systems) 20, Bank of Italy, Directorate General for Markets and Payment System.
    3. Diego Alejandro Martínez-Cruz, 2021. "Indicador Combinado de Liquidez para la Deuda Pública Local Colombiana," Borradores de Economia 1167, Banco de la Republica de Colombia.
    4. Lara, José Luis & López-Gallo, Fabrizio & Lord, Stefano & Romero, Alberto, 2021. "Effects of the international regulatory reforms over market liquidity of Mexican sovereign debt," Journal of Financial Stability, Elsevier, vol. 52(C).
    5. Stephen Morris & Hyun Song Shin, 2016. "Risk Premium Shifts and Monetary Policy: A Coordination Approach," Central Banking, Analysis, and Economic Policies Book Series, in: Elías Albagli & Diego Saravia & Michael Woodford (ed.),Monetary Policy through Asset Markets: Lessons from Unconventional Measures and Implications for an Integrated World, edition 1, volume 24, chapter 5, pages 131-150, Central Bank of Chile.

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