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The
increase in liquidity risk in these two sectors likely stemmed
from structural changes rather than, as some analysts suggest,
from tighter capital regulations on Wall Street dealers which
traditionally make markets for stocks and Treasuries, a group of
New York Fed economists wrote in a blog titled "Has Liquidity
Risk in the Treasury and Equity Markets Increased?"
While the liquidity of stocks and Treasuries have returned to
levels they were at prior to the global financial crisis,
episodes of illiquidity such as the "flash crash" on Wall Street
in 2010 and the "flash rally" in Treasuries in Oct. 15, 2014
seem to occur more frequently, New York Fed economists Tobias
Adrian, Michael Fleming, Daniel Stackman, and Erik Vogt said.
Some analysts have named tighter regulations as the key factor
for these "flash" events where stock or bond prices plummet or
soar in a matter of minutes without fundamental reason. Strict
capital rules, they say, have forced dealers to take less risk
and own fewer stocks and Treasuries on their books even during
times of extreme market volatility.
The New York Fed economists, however, see the rise in liquidity
risk as being due to another factor.
"Our findings further suggest that the increase in liquidity
risk is more likely attributable to changes in market structure
and competition than dealer balance sheet regulations, since the
latter would also have caused corporate bond liquidity risk to
rise," the New York Fed economists said.
(Reporting by Richard Leong; Editing by Chizu Nomiyama)
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