- The subject of liquidity and price transparency in derivatives markets has grown in importance in recent years in light of regulatory efforts under way to improve market transparency.
- The Dodd-Frank Act, for example, calls for rules that provide for the public availability of over-the-counter derivatives transaction data in real time.
- Despite the need for greater clarity on how derivatives markets such as the inflation swap market operate, a lack of transaction data has been an obstacle.
- Fleming and Sporn attempt to overcome that obstacle by using a novel transaction data set to examine trading activity and price transparency in the burgeoning U.S. inflation swap market.
- They observe that the market appears reasonably liquid and transparent, in spite of its over-the-counter nature and modest level of trading activity.
- Specifically, transaction prices are found to be typically close to widely available end-of-day quoted prices and realized bid-ask spreads are shown to be modest, even though the authors’ reasonably comprehensive 2010data contain just over an average of two trades per day.
- Fleming and Sporn also identify concentrations of activity in tenors of ten years and trade sizes of $25million and among certain market participants, as well as various attributes that can explain trade sizes and price deviations.
- The study can serve as a resource for policymakers considering public reporting and other regulatory initiatives and for market participants and observers more generally interested in the workings of the inflation swap market.