Queue position is a form of risk, not just a time delay, and that market makers react to that risk by withholding liquidity. A queueing model applied to a price-time priority market finds losses to depth of as much as 8%. This inefficiency does not exist in pro-rata systems (though they have their own problems).
The COVID ‘dash for cash’ turned fixed‑income markets into a stress test of a system where asset managers demand liquidity but banks manufacture money. The bottleneck became the dealer balance sheet, not bank solvency. It recommends connecting up asset managers with the clearing, settlement and central banking systems.
High-frequency traders in Canadian bond futures mainly act as tiny, fast liquidity buffers for big institutions, not as predators pushing their costs up.
This is my favorite paper. We propose to redesign the government’s debt program to better harvest liquidity premia, such as via bond buybacks, zero-coupon issuance, and perpetuities. The paper presents four blue-sky ideas for lowering the cost of the Government of Canada’s debt without increasing the debt’s risk profile.
Post‑crisis capital and liquidity rules can unintentionally drain dealer risk‑bearing capacity and make markets thinner and more fragile, especially in stress. A model of securities dealers subject to leverage, position, and liquidity constraints inspired by Basel III–style regulation shows these constraints change dealers’ willingness to intermediate trades and hold inventory, which feeds through to bid–ask spreads and market depth.
Government of Canada bonds, bills, and real‑return bonds form a tightly interconnected ecology: they fund the federal government, anchor Canadian yield curves and pricing, and sit at the core of trading, collateral, and risk management across the financial system.
Securities‑financing markets in Canada (repos and securities lending) are the plumbing that lets a relatively small stock of government bonds support ever‑rising trading volumes.
Institutional investors do sometimes make markets in Canadian bonds, but only at the margin, and mainly when dealers are stretched. Customer liquidity is small, expensive, and used as a back‑up source rather than a primary one.
At the time, Canadian bond dealers were still mostly principal traders, using their own balance sheets to take the other side of client trades, with pure agency ‘riskless principal’ activity remaining relatively small and concentrated among smaller firms.
Bank of Canada policy statements move markets in two distinct ways: through the surprise in the policy rate itself (the “level” component) and through the surprise in the tone about the future path of rates (the “slope” component).