Many many Minyans have asked me about the mechanics of the repo market. Every large dealer has an account at the Fed. The Fed will make an announcement at 10 a.m. indicating the amount of activity they are willing to underwrite. Whoever is interested will call the Fed. There is always interest.
Essentially a repo is an overnight loan. Although it comes in the form of an agreement where the dealer sells treasury securities to the Fed and agrees to buy them back the next day, this is all done by book entry. The dealer now knows it has the amount agreed to as a credit entry at the Fed. In this way the dealer has excess funds overnight.
The Fed will normally increase this liquidity before treasury auctions to allow the dealers funds to buy the auction and then distribute the inventory to clients. In this case, it is merely a way to stabilize the Fed Funds rate around these auctions. It is highly doubtful that a dealer would use the funds for an uncorrelated and risky purpose like buying stocks. If there is a pattern of consistent activity, the cumulative affect will add liquidity to the system. This makes things like margin loans easier to make. In this way excess liquidity can find its way into equities.
One Minyan has tracked repo activity and we are doing a study now to see if there is any correlation to stock movements. We will let you know the results.
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