The latest edition of the Federal Reserve Bank of New York’s Current Issues in Economics and Finance, Intraday Trading in the Overnight Federal Funds Market, is available.
Using new transaction-level data, authors Leonardo Bartolini, Svenja Gudell, Spence Hilton and Krista Schwarz show that trade volume in the federal funds market exhibits large swings over the course of the day while prices remain fairly stable, with rate volatility rising sharply only near the end of the trading day.
Trading volume, which first peaks in the morning between 8:30 and 10:00 a.m. and then dips from the late morning through mid-afternoon, peaks again at even higher levels late in the afternoon, with nearly 40 percent of total trading condensed in the last two hours, according to the authors’ analysis. The peak in volume toward the end of the day coincides with a key institutional deadline in the fed funds market: the cessation of reserve flows between banks on Fedwire at day’s end. The final tallying of banks’ reserves for regulatory purposes, also occurring at the closing of Fedwire, provides further incentive for banks to trade near the end of the day.
The authors employed a sample of more than 100,000 individual brokered trades over 660 business days from February 2002 to September 2004.
Leonardo Bartolini is a senior vice president in the International Research Function of the Research and Statistics Group. Svenja Gudell, formerly an assistant economist in the International Research Function, is employed at Analysis Group, Inc. Spence Hilton is a vice president in the Bank’s Markets Group. Krista Schwarz, formerly a trader analyst in the Markets Group, is a graduate student at Columbia Business School.