Non-Bank Dealing and Liquidity Bifurcation in Fixed-Income Markets

42 Pages Posted: 16 Jan 2025 Last revised: 8 Mar 2025

See all articles by Michael Brolley

Michael Brolley

Wilfrid Laurier University - Lazaridis School of Business and Economics

David A. Cimon

Bank of Canada

Date Written: March 08, 2025

Abstract

Non-banks, such as principal trading firms and hedge funds, increasingly compete with bank-owned dealers in fixed income markets. Some market participants worry that if non-banks push out established bank dealers, liquidity will become unreliable during times of stress. We model non-bank entry and state-dependent liquidity provision where non-banks improve liquidity more during normal times than in stress. In our model, the entry of non-banks improves liquidity in large markets and provides opportunistic dealing in small, previously unserved markets. The downside is that banks may exit marginal asset markets under the threat of non-bank entry, reducing the reliability of liquidity provision.

Keywords: Fixed income, dealers, non-bank financial institutions, principal trading firms, hedge funds, liquidity, market structure, entry decisions

JEL Classification: G10, G20, G21, G23, L10, L13, L14

Suggested Citation

Brolley, Michael and Cimon, David A., Non-Bank Dealing and Liquidity Bifurcation in Fixed-Income Markets (March 08, 2025). Available at SSRN: https://ssrn.com/abstract=5089905 or http://dx.doi.org/10.2139/ssrn.5089905

Michael Brolley

Wilfrid Laurier University - Lazaridis School of Business and Economics ( email )

Lazaridis Hall, 4071
75 University Avenue
Waterloo, Ontario N2L 3C5
Canada

HOME PAGE: http://www.mikerostructure.com

David A. Cimon (Contact Author)

Bank of Canada ( email )

234 Wellington Street
Ottawa, Ontario K1A 0G9
Canada

HOME PAGE: http://www.davidcimon.ca

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