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Click or Call? Auction Versus Search in the Over-the-Counter Market

41 Pages Posted: 19 Nov 2011 Last revised: 19 Aug 2014

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Ananth Madhavan

BlackRock, Inc.

Date Written: September 4, 2012

Abstract

Over-the-counter (OTC) markets dominate trading in many asset classes. Will electronic trading displace traditional OTC “voice” trading? Can electronic and voice systems coexist? What types of securities and trades are best suited for electronic trading? We study these issues by focusing on an innovation in electronic trading technology that enables investors to simultaneously search many bond dealers. We show that periodic one-sided electronic auctions are a viable and important source of liquidity even in inactively traded instruments. These mechanisms are a natural compromise between bilateral search in OTC markets and continuous double auctions in electronic limit order books.

Keywords: Corporate bonds, electronic trading, auction markets, over-the-counter (OTC) trading

JEL Classification: G10, G20

Suggested Citation

Hendershott, Terrence and Madhavan, Ananth, Click or Call? Auction Versus Search in the Over-the-Counter Market (September 4, 2012). Journal of Finance, Forthcoming. Available at SSRN: https://ssrn.com/abstract=1961350 or http://dx.doi.org/10.2139/ssrn.1961350

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

Ananth Madhavan (Contact Author)

BlackRock, Inc. ( email )

400 Howard Street
San Francisco, CA 94105
United States

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