Why Do Dealers Buy High and Sell Low? An Analysis of Persistent Crossing in Extremely Segmented Markets

Review of Finance, Forthcoming

69 Pages Posted: 17 Mar 2012 Last revised: 10 Jun 2016

See all articles by Vladimir A. Atanasov

Vladimir A. Atanasov

William and Mary - Raymond A. Mason School of Business

John J. Merrick, Jr.

Raymond A. Mason School of Business - William & Mary

Philipp Schuster

University of Stuttgart

Date Written: February 12, 2016

Abstract

We find that small buy trades of U.S. agency mortgage-backed securities (MBS) are priced 3%-8% lower than large sell trades. No such “crossing” exists in corporate bonds and agency debentures. We attribute the MBS price patterns to impediments to position aggregation in combination with investor suitability rules that disproportionately affect retail-sized trading and show in a model that classic market frictions cannot produce crossing. Our findings imply that valuations placed on securities affected by aggregation and suitability frictions should adjust for position size. Such securities include not only agency MBS, but also ABS, CMBS, CMOs, CLOs, and private-label RMBS.

Keywords: agency mortgage-backed securities, corporate bonds, agency debentures, market frictions, market crossing, suitability, market fragmentation, volume imbalance

JEL Classification: G12, G21, G23

Suggested Citation

Atanasov, Vladimir A. and Merrick, Jr., John J. and Schuster, Philipp, Why Do Dealers Buy High and Sell Low? An Analysis of Persistent Crossing in Extremely Segmented Markets (February 12, 2016). Review of Finance, Forthcoming, Available at SSRN: https://ssrn.com/abstract=2023779 or http://dx.doi.org/10.2139/ssrn.2023779

Vladimir A. Atanasov (Contact Author)

William and Mary - Raymond A. Mason School of Business ( email )

P.O. Box 8795
Williamsburg, VA 23187-8795
United States

John J. Merrick, Jr.

Raymond A. Mason School of Business - William & Mary ( email )

Williamsburg, VA 23187
United States
757-221-2721 (Phone)

HOME PAGE: http://https://mason.wm.edu/faculty/directory/full-time-faculty/merrick_j.php

Philipp Schuster

University of Stuttgart ( email )

Keplerstraße 17
D-70174 Stuttgart
Germany
+49 711 685-86001 (Phone)

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