Finance at the speed of light: Is faster trading always better?

Marius Zoican 20 September 2014

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Few activities embraced the computer age so actively as trading. Loud and hectic pits have been progressively replaced by silent computer server rooms. Transactions are no less dynamic for it, however. A London-based trader can buy stocks in Frankfurt within just 2.21 milliseconds.1 Light needs 2.12 milliseconds to travel the same distance. Welcome to the age of algorithmic and high-frequency trading!

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Topics:  Financial markets

Tags:  high-frequency trading, algorithmic trading, technology, liquidity, spreads, price discovery, adverse selection, exchanges, competition-stability trade-off

Shadow banking and the economy

Alan Moreira, Alexi Savov 16 September 2014

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Shadow banking, what is it good for? At the epicentre of the global financial crisis, shadow banking has become the focus of intense regulatory scrutiny. All reform proposals implicitly take a stance on its economic value.

According to the prevailing regulatory arbitrage and neglected risks views, it doesn’t have any – shadow banking is about evading capital requirements, exploiting ‘too big to fail’, and marketing risky securities as safe to unwitting investors. The right response is to bring shadow banking into the regulatory and supervisory regime that covers insured banks.

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Topics:  Financial markets Global crisis Macroeconomic policy

Tags:  shadow banking, banking, financial crisis, global crisis, regulatory arbitrage, liquidity transformation, financial stability, externalities, collateral, business cycle, financial regulation, financial fragility, liquidity, liquidity crunch

Persistent noise, investors’ expectations, and market meltdowns

Giovanni Cespa, Xavier Vives 22 April 2014

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The recent financial crisis has revived interest in the question of what triggers crashes and meltdowns in financial markets. An important reason for abrupt and large price dislocations is the lack or ‘slow motion’ of arbitrage capital (Duffie 2010) that weakens the risk-bearing capacity of liquidity providers.

We suggest that there is an alternative explanation based on expectations dynamics in the presence of persistent market noise.

In the market:

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Topics:  Financial markets

Tags:  liquidity, financial crises, asset prices, noise trading, informational efficiency

Recent studies reinforce the case for the Liquidity Coverage Ratio

Stefan W Schmitz, Heiko Hesse 28 February 2014

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With the underpricing of liquidity risk prior to the crisis, a return to the same pre-crisis liquidity pattern is not expected. There is widespread consensus that banks’ extensive pre-crisis reliance on deep and broad unsecured money markets is to be avoided in the future (see e.g. IMF 2013). Creating substantial liquidity buffers across the board is the explicit aim of a number of regulatory responses to the crisis, such as the CEBS Guidelines on liquidity buffers (CEBS 2009) and the LCR.

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Topics:  EU institutions Financial markets

Tags:  liquidity, banking

A call for liquidity stress testing and why it should not be neglected

Clemens Bonner 06 February 2014

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The recent financial crisis has shown that neglecting liquidity risks comes at substantial costs. In order to reinforce banks’ resilience to liquidity risks, the Basel Committee on Banking Supervision (BCBS) proposed the introduction of two harmonised liquidity standards:

  • The liquidity coverage ratio; and
  • The net stable funding ratio.

While the implementation of harmonised liquidity regulation across the globe is a unique and necessary step for supervision, one single metric cannot provide a complete picture of an institution’s liquidity risk profile.

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Topics:  Financial markets

Tags:  liquidity, banks, stress tests

The determinants of banks’ liquidity buffers and the role of liquidity regulation

Clemens Bonner, Iman van Lelyveld, Robert Zymek 01 November 2013

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Until recently, liquidity risk was not the main focus of banking regulators. However, the 2007–2009 crisis showed how rapidly market conditions can change, exposing severe liquidity risks for some institutions. Although capital buffers were effective in reducing liquidity stress to some extent, they were not always sufficient. In the light of this, efforts are underway internationally as well as in individual countries to establish or reform existing liquidity risk frameworks – most notably the proposals by the Basel Committee on Banking Supervision (BCBS 2013).

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Topics:  Financial markets Microeconomic regulation

Tags:  transparency, liquidity, regulation, banking, Too big to fail, disclosure

The impact of liquidity regulation on monetary-policy implementation

Clemens Bonner, Sylvester Eijffinger 14 October 2013

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In response to the recent financial crisis, the Basel Committee on Banking Supervision has drafted a new regulatory framework (henceforth Basel III) with the aim to achieve a more robust banking system. While it also tightens the existing requirements for capital, the proposal stands out as it is the first to attempt harmonised liquidity regulation across the globe. Specifically, the framework includes the short-term Liquidity Coverage Ratio (Liquidity Coverage Ratio) and the long-term Net Stable Funding Ratio.

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Topics:  Financial markets Monetary policy

Tags:  monetary policy, liquidity, financial regulation, BASEL III, liquidity coverage ratio

Enhancing the global financial safety net through central-bank cooperation

Edwin M. Truman 10 September 2013

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The prospect that the Federal Reserve will soon ease off on its purchases of long-term assets has increased financial-market uncertainty and contributed to a retrenchment in global capital flows. This turbulence has revived discussion of the need to enhance the global financial safety net –i.e. the set of arrangements to provide international liquidity to countries facing sharp reversals in capital inflows despite following sound economic and financial policies.1

The dominant lessons from the financial crises of the past decade are:

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Topics:  Global crisis International finance

Tags:  Central Banks, liquidity, banking, debt

Global factors in capital flows and credit growth

Valentina Bruno, Hyun Song Shin 07 June 2013

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It is a cliché that the world has become more connected, but the financial crisis and the boom that preceded it have focused attention on the global factors behind credit growth and capital flows. Calvo, Leiderman and Reinhart (1993, 1996) famously distinguished the global ‘push’ factors for capital flows from the country-specific ‘pull’ factors, and the Bank for International Settlements report on global liquidity (the ‘Landau report’) has highlighted the role of cross-border banking in the transmission of financial conditions (BIS 2011).

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Topics:  International finance

Tags:  liquidity

Stock market turnover and corporate governance

Alex Edmans, Vivian W Fang, Emanuel Zur 16 February 2013

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The stock market is a powerful tool for controlling corporation’s behaviour. But what is best:

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Topics:  Financial markets

Tags:  financial markets, liquidity, corporate governance, firms, stocks

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