Paired Corporate Bond Trades

37 Pages Posted: 28 Jul 2010  

Eric Zitzewitz

Dartmouth College; NBER

Date Written: July 26, 2010

Abstract

Using a newly introduced TRACE variable that identifies the side(s) taken by dealers in each trade, I find that 37 percent of dealer-client trades are accompanied by an inter-dealer trade, usually for the exact same quantity and often executed at the exact second as the client trade. All but 0.4 percent of these trade pairs would involve a non-negative profit for a dealer who was involved in both trades. Pairing is much more common for small trades - 46 percent of trades under $100,000 are paired, but only 4.5 percent of trades of $500,000 and above. Controlling for trade size, pairing is less common for trades by institutional clients. Paired trades involve higher trading costs, which are split roughly 50-50 between the pairing dealer and the dealer ultimately taking the other side. Taken together, the evidence suggests that pairing is a symptom of clients being unable to search over the entire market, producing nearly risk-free trading profits for dealers with client relationships or contractual rights to handle order flow.

Keywords: Execution quality, trading costs, dealer markets, fixed income, proprietary trading, TRACE

JEL Classification: G24, G18

Suggested Citation

Zitzewitz, Eric, Paired Corporate Bond Trades (July 26, 2010). Available at SSRN: https://ssrn.com/abstract=1648994 or http://dx.doi.org/10.2139/ssrn.1648994

Eric W. Zitzewitz (Contact Author)

Dartmouth College ( email )

Hanover, NH 03755
United States
603-646-2891 (Phone)
603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~ericz

NBER ( email )

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Cambridge, MA 02138
United States

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