Quote Competition in Corporate Bonds

Authors

Terrence Hendershott, University of California, Berkeley - Haas School of BusinessFollow
Dan Li, Board of Governors of the Federal Reserve SystemFollow
Dmitry Livdan, University of California, BerkeleyFollow
Norman Schürhoff, Swiss Finance Institute - HEC LausanneFollow
Kumar Venkataraman, Southern Methodist University (SMU) - Finance DepartmentFollow

Publication Date

12-4-2021

Abstract

Using data on indicative quotes dealers provide to clients, we establish empirical relationships regarding quote competition in the corporate bond market. Market-wide higher quoting activity is associated with greater trading volume and lower trading costs. At the dealer level, quoting dealers attract order flow with more and better quotes attracting more volume. These effects are larger when uncertainty is higher in terms of lower credit ratings and higher volatility, including the onset of Covid-19. Quote competition for order flow is associated with improved execution as clients receive better prices when more dealers quote and when clients trade with better quoting dealers. Our results are consistent with quote competition playing an important role in corporate bond trading.

Document Type

Article

Keywords

Pretrade transparency, quotes, corporate bonds, OTC markets, order flow competition

Disciplines

Finance

DOI

10.2139/ssrn.3982686

Source

SMU Cox: Finance (Topic)

Language

English