Size Effects in the Pricing of Large Orders

Financial Markets, Institutions and Instruments, 2012

Pace University Finance Research Paper No. 2012/09

41 Pages Posted: 24 Jul 2012

See all articles by Padma Kadiyala

Padma Kadiyala

Pace University - Lubin School of Business

P. Viswanath

affiliation not provided to SSRN

Date Written: February 1, 2012

Abstract

Large orders for corporate bonds get preferential treatment unlike large orders for stocks on the NYSE. A structural explanation, namely, that the corporate bond market is dealer-dominated has been offered for the favorable pricing. In this paper, we offer an additional explanation, namely, that the improved pricing for large orders is due to the net impact such orders have on a market maker’s costs. Using a data sample that is substantially free of timing mismatch, we support our assertion by sorting the sample into ‘brokered’ trades, which are trades where the dealer merely crosses buy and sell orders and ‘inventoried’ trades, where the dealer trades out of his inventory. We find that large orders raise information costs, but lower inventory costs for ‘inventoried’ trades. The net result is a smaller price advantage than received by large orders on ‘brokered’ trades which are not subject to these costs.

Keywords: corporate bonds, market micro-structure, TRACE

JEL Classification: G10, G24

Suggested Citation

Kadiyala, Padma and Viswanath, P., Size Effects in the Pricing of Large Orders (February 1, 2012). Financial Markets, Institutions and Instruments, 2012, Pace University Finance Research Paper No. 2012/09, Available at SSRN: https://ssrn.com/abstract=2116719

Padma Kadiyala (Contact Author)

Pace University - Lubin School of Business ( email )

1 Pace Plaza
New York, NY 10038-1502
United States
914-773-3620 (Phone)

P. Viswanath

affiliation not provided to SSRN

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