Nicholas Pratt
Nicholas Pratt

Liquidity provision and the changing face of currency relationships

As banks withdraw from market-making, a growing number of non-banks are stepping in to fi ll the void as Nicholas Pratt discovers.

First Published: e-Forex Magazine 73 / Liquidity Management / September, 2016

A notable trend of recent years has been the withdrawal of major banks from market making in various asset classes. The fixed income market has been particularly affected by this withdrawal, which is due to both banks’ aversion to risk and also capital charges that penalise banks for holding certain assets on their balance sheets.  This withdrawal has created concerns about a liquidity crisis in corporate bond markets as the primary dealers reduce the size of their inventories. At the same time, investment in fixed income mutual funds has doubled to $3.5 trillion and asset managers are now expected to take on a greater market-making role and provide more liquidity given that they are the primary holders of capital.  The fixed income market is not alone in seeing an emergence of non-bank liquidity providers. The FX market is also seeing a similar trend with a number of high frequency trading firms stepping into a liquidity vacuum caused by banks’ retreat from market-making...continued

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