Bond Markets Liquidty and Technological Innovation

Denis Beau * Sous-gouverneur, Banque de France.L'auteur remercie Emmanuelle Assouan et les collègues de la Banque de France et de l'ACPR (Autorité de contrôle prudentiel et de résolution) qui ont contribué à la préparation de cet article.
Marie-Laure Barut-Etherington Chef du service de gestion des réserves, Direction générale des opérations, Banque de France. Contact :

Fixed income markets are in a state of transition and this is accompanied by the perception of a decrease in liquidity and a risk for the financial system stability. The reality is more nuanced and traditional indicators sometimes appear in contradiction with participants’ intuition. The change in liquidity provision seems to affect most those market segments that are less deep than others, and is more visible through an increase in volatility and a reduction of the transaction sizes, than through the variation in its pricing. This evolution can be attributed to cyclical and structural drivers, one of the most important being technological innovation. By reducing transaction costs and widening market access, the rise of electronic trading has had a positive impact on liquidity. But it has also allowed the emergence of new competitors and their algorithm strategies, whose impact on liquidity can have a destabilizing effect. Authorities as well as private sector should then pursue their efforts to enhance transparency, while ensuring that they contribute to a level playing field and preserve trading intermediaries’ diversity.

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