Quote Competition in Corporate Bonds

Terrence Hendershott, University of California, Berkeley - Haas School of Business
Dan Li, Board of Governors of the Federal Reserve System
Dmitry Livdan, University of California, Berkeley
Norman Schürhoff, Swiss Finance Institute - HEC Lausanne
Kumar Venkataraman, Southern Methodist University (SMU) - Finance Department


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.