Adrian Walton is a Senior Economist in the Financial Markets Department at the Bank of Canada. His research focuses on how the rules and conventions that govern trading in financial assets affect market functioning, specifically in Canadian equity and fixed-income markets.
Staff analytical notes
The disruption due to COVID-19 reverberated through the bond markets in three phases. In the first phase, dealers met the rising demand for liquidity. In the second, dealers reduced the supply of liquidity, and trading conditions worsened significantly. Finally, the market returned to relative stability following several interventions by the Bank of Canada.
The cost of borrowing Government of Canada treasury bills (t-bills) in the repurchase (repo) market is mainly explained by the relationship between the parties involved. Some pairs of parties conduct most of their repos for t-bills rather than bonds, and at relatively high borrowing costs. We speculate that these pairs have formed a mutually beneficial service relationship in which one party consistently receives t-bills, while the other receives cash at a relatively cheap rate.
Government of Canada bonds in circulation that promise very similar payoffs can have different prices. We study the reason for these differences. Bonds that trade more often and earn high rental income in the repurchase agreement (repo) market tend to have higher prices. Bonds with longer tenors and times to maturity tend to have lower prices. This contrast between cheap and expensive bonds is important because trading volume and rental income can change rapidly, unlike tenor and time to maturity, which are stable.
Price controls, or caps, can lead to shortages, as 1970’s gasoline price controls illustrate. One million trades show that the market for borrowing bonds in Canada has an implicit price cap: traders are willing to pay no more than the overnight interest rate to borrow a bond. This suggests the probability of a shortage increases when interest rates are very low.
Staff discussion papers
This paper presents four blue-sky ideas for lowering the cost of the Government of Canada’s debt without increasing the debt’s risk profile. We argue that each idea would improve the secondary-market liquidity of government debt, thereby increasing the demand for government bonds and thus lowering their cost at issuance.
This paper investigates how a low or negative overnight interest rate might affect the Canadian repo markets. The main conclusion is that the repo market for general collateral will continue to function effectively.
Staff working papers
Dealers connect investors who want to buy or sell securities in financial markets. Over time, dealers and investors form trading networks to save time and resources. An emerging field
of research investigates how networks form.
In 2015, TSX Alpha, a Canadian stock exchange, implemented a speed bump for marketable orders and an inverted fee structure as part of a redesign. We find no evidence that this redesign impacted market-wide measures of trading costs or contributed appreciably to segmenting retail order flow away from other Canadian venues with a maker-taker fee structure.
We study settlement fails for trades in the Government of Canada bond market. We find that settlement fails do not occur independently. Using a novel and comprehensive dataset, we examine three drivers of fails.
In August 2012, the New York Stock Exchange launched the Retail Liquidity Program (RLP), a trading facility that enables participating organizations to quote dark limit orders executable only by retail traders.