Market Structure and Transaction Costs of Index CDSs
108 Pages Posted: 31 May 2016 Last revised: 5 Dec 2019
Date Written: October 29, 2018
Despite a regulatory effort to promote all-to-all trading, the post-Dodd-Frank index CDS market remains two-tiered. Transaction costs are higher for dealer-to-client than interdealer trades, but the difference is explained by the higher, largely permanent, price impact of client trades. Most interdealer trades are liquidity motivated and executed via low-cost, low-immediacy trading protocols. Dealer-to-client trades are not anonymous; they almost always improve upon contemporaneous executable interdealer quotes, and dealers appear to price discriminate based on the perceived price impact of trades. Our results suggest the market structure is a consequence of the characteristics of client trades: relatively infrequent, large in size, and differentially informed.
Keywords: CDX, Dodd-Frank Act, Market Structure, Transaction Costs, Swap Execution Facility, Trading Protocols, Workup
JEL Classification: G12, G13, G14, G28
Suggested Citation: Suggested Citation