w York is charged with the task of performing all open market operations activities.What is open market operations? Simply put, it is the buying and selling of securities in the market, in order to influence reserves and the fed funds rate. In order for open market operations to work effectively, the assets traded must be able to be bought and sold quickly, and in any volume the FED deems necessary. These conditions require a highly active market. Therefore, U.S. government securities, which have the broadest and most active U.S. financial market, are the preferred asset. The FED currently conducts these trades with twenty-four primary dealers that actively trade in the U.S. government securities market (see Figure 1). If the FED analysts estimate that reserve supplies differ significantly from reserves demanded, the trading desk will add or remove reserves through open market operations to balance reserves supply with reserves demand. The open market operations trading desk seeks to manage reserve levels in a way that will steer the Federal funds rate to trade around the level agreed to by the FOMC. The trading desk staff adjusts supply of reserves to achieve a price, Federal funds rate. When the FED seeks to undertake a particular operation, staff members of the Federal Reserve Bank of New York's trading desk send a message to all the primary dealers using the TRAPS system. TRAPS (Trading Room Automated Processing System), is linked to each of the primary dealers, and is the primary trading system the FED uses for open market operations. The message contains the type and maturity of the operation being performed. The dealers have several minutes to input their bids. Once the trading desk receives all the bids, they are arranged in order of the most attractively priced. Trades are then accepted up to the point where the desired amount to buy or sell is reached. Once each chosen bid has been accepted, the trading desk will...
