To facilitate such heterogeneity, many FICC markets have historically been built around a “market-making” trading model, in which participants trade bilaterally with an intermediary, rather than directly with other investors. For example, in corporate bond markets a market maker will build up an inventory of different corporate bonds when there are net sales from end investors, and run it down when there are net purchases. An important advantage of the market-making system is that, when it works effectively, it provides investors with continuous two way markets. Government and corporate borrowers can generally be confident that they will be able to borrow at a time, in a currency, and for a duration that suits them. Similarly, investors can feel confident that they will be able to trade smoothly in and out of sometimes large positions without unduly affecting the market price. 1  http://www.fca.org.uk/your-fca/documents/final-notices/2014/lloyds-bank-plc-bank-of-scotland-plc.pdf  2  http://www.fsa.gov.uk/static/pubs/final/barclays-jun12.pdf  3  I am particularly grateful to Nicholas C. Barberis for this exposition. 4  Daniel Kahneman (2011), Thinking Fast and Slow, Macmillan. BIS central bankers’ speeches  3  The downside of the heterogeneity of many FICC assets is that the market in specific instruments can sometimes be thin, and hence it may be difficult to gauge what a fair price is. Publicly available quotes can be based on a limited number of small transactions, making them more vulnerable to manipulation. Another characteristic of FICC markets is that they tend to be dominated by large professional counterparties.

In the consultation document, we ask whether that process should go further, whether through industry-led standardisation, removing barriers to entry for new electronic trading platforms or utilities, or further transparency enhancements to practices such as new issue allocation. Or could imposing standardisation or transparency standards in excess of those already in place harm, rather than enhance, market functioning and risk transfer? Do practices such as ‘internalisation’ – where banks match off client orders internally – pose any challenges? 2. Competition and market discipline  The second structural category is competition and market discipline. Concentration in some FICC markets is relatively high both amongst intermediaries and amongst the major asset managers, and has risen further since the financial crisis. For example, the top six dealers account for over 60% of the UK interdealer FX market. In some cases, firms have also engaged in horizontal or vertical integration – raising potential conflicts of interest and concerns about information asymmetries. A number of recent misconduct cases have involved attempted collusion, abuse of market power or inadequate management or control of conflicts. The ability of FICC market participants to exercise market discipline against those engaging in misconduct may also have diminished somewhat in recent years. At the same time, the market maker system has delivered important benefits, including tight pricing and deep and near-continuous liquidity in a wide range of market conditions.