Working Paper: CEPR ID: DP16437
Authors: Norman Schurhoff; Dmitry Livdan; Terrence Hendershott
Abstract: We examine technology enabling dispersed investors to directly trade with each other in over- the-counter markets via the largest electronic trading platform in corporate bonds starting Open Trading (OT) to allow investor-to-investor trading. Over our six year sample OT steadily grew to win 12% of trades on the platform, with 2% being investor-to-investor trading, 3% being dealers trading with new clients, and 7% being new liquidity providers acting like dealers. This suggests that investors in corporate bonds prefer intermediation to direct trade. However, OT can enable new dealers to compete in liquidity provision. OT’s steady growth facilitates measuring its effect on investors, dealers, and competition to provide liquidity using an auction model.
Keywords: over-the-counter markets; electronic trading; request for quote; open trading; corporate bonds; dealers
JEL Codes: G12; G14; G19
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Open Trading (OT) (F13) | Price Improvement (D49) |
| Open Trading (OT) (F13) | Trading Costs (D23) |
| Open Trading (OT) (F13) | Dealer Competitiveness (L81) |
| Open Trading (OT) (F13) | Entry of New Liquidity Providers (E51) |
| Entry of New Liquidity Providers (E51) | Price Competitiveness (L11) |
| Dealer Competitiveness (L81) | Price Improvement (D49) |