Does Trade Reporting Improve Market Quality in an Institutional Market? Evidence from 144a Corporate Bonds

Abstract

We study the effect of public transaction reporting on trading activity, trade execution costs, and dealer behavior for Rule 144A corporate bonds that are primarily traded by institutional investors. TRACE reporting had no measurable impact on bond turnover, or the dealers’ willingness to hold inventory positions, participate in interdealer trades, or facilitate block transactions. Transaction costs decrease following trade reporting by approximately 10% with large reductions observed for block transactions and bonds with lower dealer competition. Small dealers gain market share and close the trading cost advantage enjoyed by large dealers. Our evidence suggests that even institutional traders benefit from improved transparency, particularly when competition among dealers is weak.