Market Makers Quote Tighter Spreads Even as Summer Volumes Thin

Order book depth within fifty basis points of mid-price has risen roughly nineteen percent across the five largest venues since June, even as aggregate spot turnover fell to its lowest level of the year. Tighter quotes in a thinner tape is not the historical pattern.

Two structural changes explain most of it. Cross-venue collateral arrangements let market makers post margin once and quote in several books simultaneously, and the growth of regulated custody has reduced the amount of inventory firms must hold on exchange to face the market.

The fragility question

Depth financed by shared collateral is efficient until a single node fails. Risk officers at two firms said their stress scenarios now model the loss of a clearing relationship rather than a price shock, on the reasoning that the latter is survivable and the former is not.