Does Dodd-Frank Affect OTC Transaction Costs and Liquidity? Evidence from Real-Time CDS Trade Reports

62 Pages Posted: 31 May 2014 Last revised: 24 Sep 2015

See all articles by Yee Cheng Loon

Yee Cheng Loon

Securities and Exchange Commission (SEC)

Zhaodong Zhong

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick

Date Written: June 29, 2015

Abstract

This paper examines transaction costs and liquidity in the index CDS market by matching intraday quotes to real-time trade reports made available through the Dodd-Frank reforms. We find that the average relative effective spread is 0.27% of price level or 2.73% of CDS spread. Dodd-Frank does affect transaction costs and liquidity. Liquidity improves after the commencement of public dissemination of OTC derivatives trades. Moreover, cleared trades, trades executed on exchange-like venues, end-user trades, and bespoke trades exhibit lower trading costs, price impact, and price dispersion. These findings improve our understanding of the OTC derivatives market that is undergoing fundamental changes.

Keywords: Dodd-Frank Act, Over-the-Counter Markets, Liquidity, Real-Time Trade Reporting, Credit Default Swaps

JEL Classification: G12, G13, G14, G18, G28

Suggested Citation

Loon, Yee Cheng and Zhong, Zhaodong, Does Dodd-Frank Affect OTC Transaction Costs and Liquidity? Evidence from Real-Time CDS Trade Reports (June 29, 2015). Journal of Financial Economics (JFE), Forthcoming, Available at SSRN: https://ssrn.com/abstract=2443654 or http://dx.doi.org/10.2139/ssrn.2443654

Yee Cheng Loon

Securities and Exchange Commission (SEC) ( email )

100 F Street NE
Washington, DC 20549
United States

Zhaodong Zhong (Contact Author)

Rutgers, The State University of New Jersey - Rutgers Business School at Newark & New Brunswick ( email )

Department of Finance, Rutgers Business School
100 Rockafeller Road
Piscataway, NJ 08854
United States

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