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Quote Competition in Corporate Bonds

SMU Cox School of Business Research Paper No. 22-03

Swiss Finance Institute Research Paper No. 22-70

Forthcoming, Journal of Finance

81 Pages Posted: 4 Feb 2022 Last revised: 23 Sep 2025

See all articles by Terrence Hendershott

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 Schuerhoff

Swiss Finance Institute - HEC Lausanne

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: December 4, 2021

Abstract

Dealer quotes in corporate bonds, though indicative, lower trading costs and increase trading volume. Dealers offering higher-quality quotes attract more order flow and execute trades at favorable prices. Dealers advertise quotes to manage their inventories and attract orders from non-relationship clients. However, quote competition is imperfect; the best quotes often fail to attract orders, and trade throughs are common. Nevertheless, quote competition is important as clients exploit quotes from other dealers in negotiations, forcing dealers with lower quality quotes to offer price improvements. Quoting is not a zero-sum game, as more active bond-level quoting leads to more bond-level trading.

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

JEL Classification: G12, G14, G24

Suggested Citation: Suggested Citation

Hendershott, Terrence J. and Li, Dan and Livdan, Dmitry and Schuerhoff, Norman and Venkataraman, Kumar, Quote Competition in Corporate Bonds (December 4, 2021). SMU Cox School of Business Research Paper No. 22-03, Swiss Finance Institute Research Paper No. 22-70, Forthcoming, Journal of Finance, Available at SSRN: https://ssrn.com/abstract=3982686 or http://dx.doi.org/10.2139/ssrn.3982686

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Dan Li

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Norman Schuerhoff

Swiss Finance Institute - HEC Lausanne ( email )

Chavannes-près-Renens
Switzerland

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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