Until 1992, only primary dealers, as designated by the Federal Reserve Bank of New York, had direct access to the interdealer brokerage platforms.6 Owing partly to the advent of direct bidding in Treasury auctions and the effects of the Salomon Brothers bidding scandal the year before, the interdealer brokers expanded access beyond primary dealers to all entities who were netting members of the Government Securities Clearing Corporation (now the Fixed Income Clearing Corporation, or FICC). Over time, other entities also gained effective access to the platforms through their prime brokers, who themselves had direct access. In more recent years, interdealer brokers have granted access to an even wider range of participants, including participants outside the FICC netting membership. A third change is the availability of close substitutes to on-the-run Treasuries, which, as noted above, account for the great majority of trading in interdealer markets. Historically, onthe-run Treasuries had a limited number of close substitutes as a highly liquid, credit-riskfree, dollar-denominated fixed-income instrument. Today, however, dealers and investors can transact in a variety of instruments that closely resemble the risk and liquidity properties of on-the-run Treasuries, including Libor-based interest rate swaps and overnight index swaps. Moreover, Treasury futures, which have existed for several decades, have become an increasingly widely used close substitute as well. Throughout this history, the Treasury market has retained one of its most important attributes – its superior liquidity. However, the concept of financial market liquidity is a notoriously difficult one to define.

For example, when the telegraph appeared in the first half of the nineteenth century, traders without immediate access cried foul when early users began leveraging the technology to minimize the time between trade decisions and execution. Electronic and algorithmic trading also has the potential to facilitate trading practices that are not helpful to market liquidity. For example, submitting a quote with the intent to cancel it before any reasonable probability of execution is detrimental to the quality of market liquidity  9  It is worth noting that the practice of trading with the intention of holding a position for a brief period of time is not new. For example, pit trading in the futures exchange featured traders who would look to earn spreads by holding positions for short periods of time and rarely overnight – similar in many ways to the practices of modern automated trading firms. 10  This raises the question of whether such firms are systematically capturing intraday exposures in their risk management systems. To the extent this remains a vulnerability, firms might consider near-term fixes they could put in place to insulate themselves from potential intraday losses. BIS central bankers’ speeches  5  and to the integrity of the market. Even if such acts are not intentionally misleading, they can still result in a false sense of market liquidity. Finally, firms employing high volume automated trading strategies could harm market liquidity if they do not manage those strategies carefully, particularly given the significant share of market activity they represent.