Customer liquidity provision in Canadian bond markets

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Abstract

This note assesses the provision of bond market liquidity by institutional customers (i.e., pension funds, hedge funds, mutual funds and insurance companies) in Canada. Customer liquidity provision occurs when a dealer, after filling an order from a customer, quickly makes an offsetting trade with an institutional investor. Customer liquidity on a large scale could have positive and negative effects on bond markets. It can diversify the supply of liquidity beyond a small group of dealers and brokers, thus making bond markets more competitive and robust. However, customer liquidity may be more sensitive to a deterioration in market conditions and thus a less reliable source of liquidity. For example, sudden redemptions at a mutual fund can force the fund to switch from supplying liquidity to demanding it (Arora 2018). In contrast, dealers have a broad set of funding sources and may be more able to provide liquidity for their clients through a range of market conditions.

Charts 1: Customer liquidity provision is low

Citation

Garriott, C., & Johal, J. (2018). Customer Liquidity Provision in Canadian Bond Markets (No. 2018-12). Bank of Canada Staff Analytical Notes.

@techreport{garriott2018customer,
  title={Customer liquidity provision in Canadian bond markets},
  author={Garriott, Corey and Johal, Jesse},
  year={2018},
  institution={Bank of Canada Staff Analytical Notes}
}