Tuesday, September 1, 2009

Depth and Breadth of the money market

The money market is extremely broad and deep, meaning it can absorb a large volume of transactions with only small effects on security prices and interest rates. Investors can easily sell most money market instruments on short notice, often in a matter of minutes. this is one of the most efficient markets in the world, containing a vast network of securities dealers, major banks, and funds brokers in constant touch with one another and alert to any "bargains." the slightest hint that a security is underpriced (i.e., carries an exceptionally high yield) usually brings forth a flood of buy orders, while money market traders are quick to dump or avoid overpriced securities. This market is dominated by active traders who constantly search their video display screens and tote boards for opportunities to arbitrage funds-i.e., move money from a corner of the market with relatively low yields to investments offering the highest returns available. And overseeing the whole market is the Federal Reserve System, which tries to ensure that trading is orderly and prices are reasonably stable.
There is no centralized trading arena in the money market as there is no a stock exchange, for example. The money market is telephone market, in which participants arrange traders over the phone and usually confirm by wire. Speed is of the essence in this market because, as we observed earlier, money is a highly perishable commodity. Each day that passes may mean thousands of dollars in lost interest income from uninvested funds. Most business between traders, therefore, is conducted in seconds or minutes, and payment is made almost instantaneously.

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