Thursday, January 12, 2012

Securities dealers' inventories at 2002 levels

US dealers continue to derisk their trading portfolios. Corporate securities (stocks and bonds) held on the balance sheets of major broker/dealers have hit the 2002 levels.

Dealer inventories (source: JPMorgan)
Furthermore as the market sizes have grown since 2002, the inventories now represent an even smaller percentage of the overall markets.

Dealer inventories as % of total markets (source: JPMorgan)
US banks and brokers currently hold roughly only 1% of all the stocks and bonds, down from the peak of 10%.   They have tightened their risk limits significantly due to increased risk aversion and in preparation for regulatory changes. This is expected to result in an overall reduction in liquidity, particularly in the credit markets.
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