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Corporate Bond Trading on a Limit Order Book Exchange

45 Pages Posted: 10 Mar 2016 Last revised: 15 Jul 2017

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration

Avi Wohl

Tel Aviv University - Coller School of Management

Date Written: July 2017

Abstract

We investigate the trading of corporate bonds (c-bonds) by an open limit order book (LOB) mechanism. To do so, we use the case of the Tel Aviv Stock Exchange (TASE) as a laboratory, in which both stocks and c-bonds are traded by an LOB mechanism. Contrary to the OTC market in the US, the TASE c-bond market is liquid with narrow spreads and low price dispersion. The short-term traders (STT), who are the analog of the market makers in the LOB, have small trading rents and unconcentrated activity (a low Herfindahl index). In the cross-section of bonds, the low concentration is related to low spreads, low price dispersion and small STT rents. The non-STT (including retail investors, whose participation is significant) compete with the STT on quotation and tend to tighter quotes. Retail investors' activity contributes to narrower spreads.

Keywords: Corporate bonds, trading costs, retail investors, short-term investors, bid-ask spreads, liquidity

Suggested Citation

Abudy, Menachem (Meni) and Wohl, Avi, Corporate Bond Trading on a Limit Order Book Exchange (July 2017). Available at SSRN: https://ssrn.com/abstract=2744867

Menachem (Meni) Abudy

Bar-Ilan University - Graduate School of Business Administration ( email )

Ramat Gan
Israel

Avi Wohl (Contact Author)

Tel Aviv University - Coller School of Management ( email )

P.O. Box 39010
Ramat Aviv, Tel Aviv, 69978
Israel
+972 3 6409051 (Phone)

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