IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

Size and heterogeneity matter. A microstructure-based analysis of regulation of secondary markets for governments bonds

  • José Ramón Martínez-Resano

    ()

    (Banco de España)

Registered author(s):

    This paper deals with the economics of secondary markets for government bonds. Ultimately, the analysis is shaped by a public policy goal: assessing the elements of a regulatory framework for these markets. In that regard, the decisive role of market structure leads to a critical review of microstructure conclusions relevant specifically for government debt markets. It is argued that the nature of information asymmetries and matching costs in government debt markets determines a bias towards a fragmented microstructure at odds both with exchange-like arrangements and with ordinary regulatory approaches. Hence, a generic conclusion highlights the risks of blindly transposing regulatory principles from the equity markets area without due regard to the specifics of the bond market. As a specific application of this idea, the paper critically reviews electronic trading platforms that emulate exchange-like order execution solutions. More specifically, the paper opposes the hybrid microstructure (pure limit order book plus affirmative quoting obligation) faced by European primary dealers and the arbitrage-based approach to market-making found in US inter-dealer markets. The Citigroup disruptive trade in August 2004 is analyzed from this perspective. Government bond regulation is argued to necessarily depart from ordinary approaches also because it captures the diverse interests of various governmental agencies. As an application of this principle, the paper discusses repo and short-selling regulation in government bond markets. The atypical market structure and the multi-agency endeavour around government bond markets raise the chances of regulatory failures. Nevertheless, it is argued that a reliance on competition, integrative infrastructure and basic systemic protections as over-arching principles for regulation is consistent with recommendations from relevant economic theory. Finally, political economy issues arising in implementation of transparency, disclosure or retail investor protection will be addressed in the context of selected country cases.

    If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.

    File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosOcasionales/05/Fic/do0501e.pdf
    File Function: First version, July 2005
    Download Restriction: no

    Paper provided by Banco de Espa�a in its series Banco de Espa�a Occasional Papers with number 0501.

    as
    in new window

    Length: 63 pages
    Date of creation: Jul 2005
    Date of revision:
    Handle: RePEc:bde:opaper:0501
    Contact details of provider: Web page: http://www.bde.es/
    Email:


    More information through EDIRC

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:

    as in new window
    1. Richard C. Green & Burton Hollifield & Norman Schurhoff, . "Financial Intermediation and the Costs of Trading in an Opaque Market," GSIA Working Papers 2004-11, Carnegie Mellon University, Tepper School of Business.
    2. Piero Gottardi & Roberto Serrano, 2004. "Market Power and Information Revelation in Dynamic Trading," CESifo Working Paper Series 1300, CESifo Group Munich.
    3. Jianjun Miao, 2004. "A Search Model of Centralized and Decentralized Trade," Microeconomics 0410003, EconWPA.
    4. Grossman, Sanford J, 1992. "The Informational Role of Upstairs and Downstairs Trading," The Journal of Business, University of Chicago Press, vol. 65(4), pages 509-28, October.
    5. Vacca, V. & Scalia, A., 1999. "Does Market Transparency Matter? A Case Study," Papers 359, Banca Italia - Servizio di Studi.
    6. Viswanathan, S. & Wang, James J. D., 2002. "Market architecture: limit-order books versus dealership markets," Journal of Financial Markets, Elsevier, vol. 5(2), pages 127-167, April.
    7. Dimitri Vayanos & Tan Wang, 2004. "Search and endogenous concentration of liquidity in asset markets," LSE Research Online Documents on Economics 455, London School of Economics and Political Science, LSE Library.
    8. Boudoukh, Jacob & Whitelaw, Robert F, 1993. "Liquidity as a Choice Variable: A Lesson from the Japanese Government Bond Market," Review of Financial Studies, Society for Financial Studies, vol. 6(2), pages 265-92.
    9. Ho, Thomas S Y & Stoll, Hans R, 1983. " The Dynamics of Dealer Markets under Competition," Journal of Finance, American Finance Association, vol. 38(4), pages 1053-74, September.
    10. Sanford J. Grossman & Merton H. Miller, 1988. "Liquidity and Market Structure," NBER Working Papers 2641, National Bureau of Economic Research, Inc.
    11. M. Ángeles de Frutos & Carolina Manzano, 2002. "Risk Aversion, Transparency, and Market Performance," Journal of Finance, American Finance Association, vol. 57(2), pages 959-984, 04.
    12. Marco Pagano & Ernst-Ludwig von Thadden, 2004. "The European Bond Markets under EMU," CSEF Working Papers 126, Centre for Studies in Economics and Finance (CSEF), University of Naples, Italy.
    13. World Bank & International Monetory Fund, 2001. "Developing Government Bond Markets : A Handbook," World Bank Publications, The World Bank, number 13865, September.
    14. Garbade, Kenneth D, 1978. "The Effect of Interdealer Brokerage on the Transactional Characteristics of Dealer Markets," The Journal of Business, University of Chicago Press, vol. 51(3), pages 477-98, July.
    15. Massa, Massimo & Simonov, Andrei, 2001. "Reputation and Interdealer Trading. A Microstructure Analysis of the Treasury Bond Market," SIFR Research Report Series 5, Institute for Financial Research.
    16. Macey, Jonathan R. & O'Hara, Maureen, 1997. "The Law and Economics of Best Execution," Journal of Financial Intermediation, Elsevier, vol. 6(3), pages 188-223, July.
    17. Lyons, Richard K., 1996. "Optimal Transparency in a Dealer Market with an Application to Foreign Exchange," Journal of Financial Intermediation, Elsevier, vol. 5(3), pages 225-254, July.
    18. Pagano, Marco & Roell, Ailsa, 1996. " Transparency and Liquidity: A Comparison of Auction and Dealer Markets with Informed Trading," Journal of Finance, American Finance Association, vol. 51(2), pages 579-611, June.
    19. Michael J. Fleming & Kenneth D. Garbade, 2002. "When the back office moved to the front burner: settlement fails in the treasury market after 9/11," Economic Policy Review, Federal Reserve Bank of New York, issue Nov, pages 35-57.
    20. Biais, Bruno, 1993. " Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-85, March.
    21. Bloomfield, Robert & O'Hara, Maureen, 1999. "Market Transparency: Who Wins and Who Loses?," Review of Financial Studies, Society for Financial Studies, vol. 12(1), pages 5-35.
    22. Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-76, October.
    23. Anand, Amber & Weaver, Daniel G., 2004. "Can order exposure be mandated?," Journal of Financial Markets, Elsevier, vol. 7(4), pages 405-426, October.
    24. Michael W. Brandt & Kenneth A. Kavajecz, 2004. "Price Discovery in the U.S. Treasury Market: The Impact of Orderflow and Liquidity on the Yield Curve," Journal of Finance, American Finance Association, vol. 59(6), pages 2623-2654, December.
    25. Michael J. Fleming & Eli M. Remolona, 1999. "Price Formation and Liquidity in the U.S. Treasury Market: The Response to Public Information," Journal of Finance, American Finance Association, vol. 54(5), pages 1901-1915, October.
    26. Schröder, Michael & Heinemann, Friedrich & Kruse, Susanne & Meitner, Matthias, 2004. "GPD-linked Bonds as a Financing Tool for Developing Countries and Emerging Markets," ZEW Discussion Papers 04-64, ZEW - Zentrum für Europäische Wirtschaftsforschung / Center for European Economic Research.
    27. Wolinsky, Asher, 1987. "Information Revelation in a Market with Pairwise Meetings," The Warwick Economics Research Paper Series (TWERPS) 284, University of Warwick, Department of Economics.
    28. Brad M. Barber & Terrance Odean, 2000. "Trading Is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors," Journal of Finance, American Finance Association, vol. 55(2), pages 773-806, 04.
    29. S. Viswanathan & James J. D. Wang, 2004. "Inter-Dealer Trading in Financial Markets," The Journal of Business, University of Chicago Press, vol. 77(4), pages 987-1040, October.
    Full references (including those not matched with items on IDEAS)

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    When requesting a correction, please mention this item's handle: RePEc:bde:opaper:0501. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mar�a Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de Espa�a)

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.