FINRA Economists Report Mixed Progress in Securitized Asset Liquidity

FINRA’s Office of the Chief Economist published a research note authored by two staff members that examined the liquidity of securitized assets over the course of the last several years. The authors utilized FINRA Trade Reporting and Compliance Engine (“TRACE”) data to evaluate liquidity in (i) real estate securities (including MBSs, CMBSs, CMOs, and TBAs) and (ii) other categories of asset-backed securities, including credit cards, automobiles, and student loans. They found that bid-ask spreads are almost universally down and the price impact of trades has fallen in every security since 2012. However, the number and volume of new issues of securitized assets have not recovered to pre-crisis levels and trading volume is generally down for most categories of securitized assets.

FINRA also published a similar analysis dealing with corporate bond liquidity.

Lofchie Comment: Regulators tend to emphasize bid/offer spread as the key data point for assessing market liquidity. However, that is only one measure of liquidity, and arguably not a very important one. The metric that the regulators should focus on more is the amount of the available liquidity; i.e., the size of the bids and offers. In any case, the authors of this study concede that trading volume in certain products is materially down, which would obviously suggest that available liquidity is materially down, notwithstanding that the spreads between bids and offers have decreased.

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