Market Structure and Transaction Costs of Index CDSs

127 Pages Posted: 31 May 2016 Last revised: 31 Oct 2018

See all articles by Pierre Collin-Dufresne

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne; Swiss Finance Institute; National Bureau of Economic Research (NBER)

Benjamin Junge

Ecole Polytechnique Fédérale de Lausanne; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Anders B. Trolle

HEC Paris - Finance Department

Date Written: October 29, 2018

Abstract

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

Collin-Dufresne, Pierre and Junge, Benjamin and Trolle, Anders B., Market Structure and Transaction Costs of Index CDSs (October 29, 2018). Swiss Finance Institute Research Paper No. 18-40. Available at SSRN: https://ssrn.com/abstract=2786907 or http://dx.doi.org/10.2139/ssrn.2786907

Pierre Collin-Dufresne

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny, Bâtiment Extranef, # 211
40, Bd du Pont-d'Arve
CH-1015 Lausanne, CH-6900
Switzerland

Swiss Finance Institute

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Benjamin Junge

Ecole Polytechnique Fédérale de Lausanne ( email )

Quartier UNIL-Dorigny
Extranef 128
Lausanne, CH-1015
Switzerland

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

c/o University of Geneve
40, Bd du Pont-d'Arve
1211 Geneva, CH-6900
Switzerland

Anders B. Trolle (Contact Author)

HEC Paris - Finance Department ( email )

France
+33 (0)1 39 67 98 70 (Phone)

HOME PAGE: http://sites.google.com/view/anderstrolle

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