Research On Liquidity And Artificial Transactions In China Interbank Bond Market

With the high frequency trading data of China Interbank and SSE bond market from Jan 2003 to Jun 2008, we investigate the liquidity characteristics, effective spread, components of bid-ask spread, and liquidity premium of Interbank bond market. We further analyze the artificial transactions in the market, discuss its relation with the market liquidity, and provide the underlying reasons.We find that, most of the transactions in Interbank bond market are liquidity trades. The market liquidity is extremely low, compared with that of the developed markets. Its effective spread is around 43bp, which is higher than SSE (i.e. 12bp), and even higher than that of the US market (i.e. 1-2 bp). The cost underlies bid-ask spread is mainly due to order processing, while the components of information and inventory cost tend towards 0. The price impact and trading volume present a negative relationship, which means the absolute prices decrease when then trading volumes increase. In then interbank bond market nowadays, liquidity is only partially priced by the proxy of price impact.The artificial transactions in Interbank bond market can be divided into wash trade (WT) and money transfer (MT). With a searching time window of 1 day, these two accounts for around one fifth of the total trading volume, this is definitely higher than one's imagination. We find artificial transactions in different bonds do not move simultaneity, but WT, MT and normal trades co-move within one bond. With a multiple rank correlation method, we detect these artificial transactions are the acts belong to only some traders, but not all. These transactions do increase the bond trading volume, as well as the liquidity, but do harm to the effective spared.The reason for WT and MT is likely the pressure of trading volume ranking by the regulatory authorities. Although these artificial transactions traders are not market makers in deed, they already behave like a market maker and already get all the market maker characteristics. We call these ones virtual market makers. These virtual market makers'trading volume is far higher than the other investors, with a small inventory percentage, and buy low sell high at the same time. We suggest that the regulatory authorities pay more attention to those transactions.