Corey Garriott is a Principal Researcher in the Financial Markets Department at the Bank of Canada. He is a researcher in market microstructure whose primary research interests center on the liquidity impact of new regulation and technology. He has worked on banking regulation, high-frequency trading, decimalization and order-flow segmentation. Corey Garriott received his PhD in economics from UCLA.
This analytical note assesses the prevalence of liquidity provision by institutional investors in Canadian bonds. We find that the practice is not prevalent in Canada. Customer liquidity provision is more prevalent for less liquid bonds, on days when liquidity is already expensive or when there are larger trading volumes. In our interpretation, Canadian dealers draw on customer liquidity as a supplementary source of liquidity and only when necessary, given its cost.
Using bond futures data, we test whether high-frequency trading (HFT) is engaging in back running, a trading strategy that can create costs for financial institutions. We reject the hypothesis of back running and find instead that HFT mildly improves trading costs for institutions.
Technology, risk tolerance and regulation may influence dealers to reduce their trading as principals (using their own balance sheets for sales and purchases of securities) in favour of agency trading (matching client trades).