Size And Heterogeneity Matter. A Microstructure-Based Analysis Of Regulation Of Secondary Markets For Government Bonds
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.
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.:
- Piero Gottardi & Roberto Serrano, 2004.
"Market Power and Information Revelation in Dynamic Trading,"
CESifo Working Paper Series
1300, CESifo Group Munich.
- Piero Gottardi & Roberto Serrano, 2005. "Market Power And Information Revelation In Dynamic Trading," Journal of the European Economic Association, MIT Press, vol. 3(6), pages 1279-1317, December.
- Piero Gottardi & Roberto Serrano, 2002. "Market Power and Information Revelation in Dynamic Trading," Economics Working Papers 0027, Institute for Advanced Study, School of Social Science.
- Piero Gottardi & Roberto Serrano, 2002. "Market Power and Information Revelation in Dynamic Trading," Game Theory and Information 0203005, EconWPA.
- Antonio Scalia & Valerio Vacca, 1999.
"Does Market Transparency Matter? a Case Study,"
Temi di discussione (Economic working papers)
359, Bank of Italy, Economic Research and International Relations Area.
- Antonio Scalia & Valerio Vacca, 2001. "Does market transparency matter? A case study," BIS Papers chapters, in: Bank for International Settlements (ed.), Market liquidity: proceedings of a workshop held at the BIS, volume 2, pages 113-144 Bank for International Settlements.
- Antonio Scalia & Valerio Vacca, 1999. "Does Market Transparency Matter? A Case Study," CGFS Papers chapters, in: Bank for International Settlements (ed.), Market Liquidity: Research Findings and Selected Policy Implications, volume 11, pages 1-27 Bank for International Settlements.
- Dmitrios Vayanos, 2004.
"Search and Endogenous Concentration of Liquidity in Asset Markets,"
Econometric Society 2004 North American Winter Meetings
647, Econometric Society.
- Vayanos, Dimitri & Wang, Tan, 2007. "Search and endogenous concentration of liquidity in asset markets," Journal of Economic Theory, Elsevier, vol. 136(1), pages 66-104, September.
- 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.
- Grossman, S.J., 1990.
"The Information Role Of Upstairs And Downstairs Trading,"
Weiss Center Working Papers
22-90, Wharton School - Weiss Center for International Financial Research.
- Grossman, Sanford J, 1992. "The Informational Role of Upstairs and Downstairs Trading," The Journal of Business, University of Chicago Press, vol. 65(4), pages 509-528, October.
- Sanford J. Grossman, "undated". "The Informational Role of Upstairs and Downstairs Trading," Rodney L. White Center for Financial Research Working Papers 22-90, Wharton School Rodney L. White Center for Financial Research.
- Pagano, Marco & von Thadden, Ernst-Ludwig, 2004.
"The European Bond Markets Under EMU,"
CEPR Discussion Papers
4779, C.E.P.R. Discussion Papers.
- Sanford J. Grossman & Merton H. Miller, 1988.
"Liquidity and Market Structure,"
NBER Working Papers
2641, National Bureau of Economic Research, Inc.
- Biais, Bruno, 1993. " Price Information and Equilibrium Liquidity in Fragmented and Centralized Markets," Journal of Finance, American Finance Association, vol. 48(1), pages 157-185, March.
- 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.
- Brian Madigan & Jeff Stehm, 1994. "An overview of the secondary market for U.S. Treasury securities in London and Tokyo," Finance and Economics Discussion Series 94-17, Board of Governors of the Federal Reserve System (U.S.).
- Victoria Saporta, 1997. "Which Inter-dealer Market Prevails? An analysis of inter-dealer trading in opaque markets," Bank of England working papers 59, Bank of England.
- 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.
- 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.
- Angel Pardo & Roberto Pascual, 2012. "On the hidden side of liquidity," The European Journal of Finance, Taylor & Francis Journals, vol. 18(10), pages 949-967, November.
- 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.
- Duane Seppi & Michael Gallmeyer & Burton Hollifield, 2004.
"Liquidity Discovery and Asset Pricing,"
Econometric Society 2004 North American Summer Meetings
525, Econometric Society.
- Burton Hollifield & Michael Gallmeyer & Duane Seppi, 2004. "Liquidity Discovery and Asset Pricing," 2004 Meeting Papers 136a, Society for Economic Dynamics.
- Michael Gallmeyer & Burton Hollifield & Duane Seppi, "undated". "Liquidity Discovery and Asset Pricing," GSIA Working Papers 2004-10, Carnegie Mellon University, Tepper School of Business.
- Coase, R H, 1974. "The Lighthouse in Economics," Journal of Law and Economics, University of Chicago Press, vol. 17(2), pages 357-376, October.
- Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1996.
"Economic News and the Yield Curve: Evidence From the U.S. Treasury Market,"
New York University, Leonard N. Stern School Finance Department Working Paper Seires
96-13, New York University, Leonard N. Stern School of Business-.
- Pierluigi Balduzzi & Edwin J. Elton & T. Clifton Green, 1997. "Economic News and the Yield Curve: Evidence from the U.S. Treasury Market," New York University, Leonard N. Stern School Finance Department Working Paper Seires 98-005, New York University, Leonard N. Stern School of Business-.
- Anand, Amber & Weaver, Daniel G., 2004. "Can order exposure be mandated?," Journal of Financial Markets, Elsevier, vol. 7(4), pages 405-426, October.
- 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.
- 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.
- 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 477-498, July.
- 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.
- 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.
- 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.
When requesting a correction, please mention this item's handle: RePEc:wpa:wuwpfi:0508007. 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: (EconWPA)
If references are entirely missing, you can add them using this form.