OTC Discount

54 Pages Posted: 4 Jun 2018

See all articles by Calebe de Roure

Calebe de Roure

Reserve Bank of Australia

Emanuel Moench

Deutsche Bundesbank

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Goethe University Frankfurt - Research Center SAFE; Ca Foscari University of Venice

Michael Schneider

Deutsche Bundesbank; Scuola Normale Superiore

Date Written: June 4, 2018

Abstract

This paper studies venue choice and price discrimination in the market for German Bunds, the world’s second most liquid treasury market. Dealers trade Bunds in a hybrid market with electronic centralized limit order books (on the interdealer exchange MTS) and a dominant over-the-counter (OTC) segment. Using a unique regulatory dataset of OTC Bund transactions matched with the full limit order book of MTS, we show that the exchange provides an outside option to the OTC search process and, crucially, immediacy. OTC trades carry an average discount of 1.3 - 3.7 basis points relative to trading on exchange, and OTC round-trip costs are on average up to 50% lower than on the MTS market. OTC trades by dealers with access to the exchange are on average 0.6 basis points cheaper than those by non-MTS dealers. Our findings highlight the complementary roles played by centralized limit order book and OTC markets.

Keywords: venue choice, hybrid markets, sovereign bond markets

Suggested Citation

de Roure, Calebe and Moench, Emanuel and Pelizzon, Loriana and Schneider, Michael, OTC Discount (June 4, 2018). Paris December 2018 Finance Meeting EUROFIDAI - AFFI. Available at SSRN: https://ssrn.com/abstract=3190503

Calebe De Roure

Reserve Bank of Australia ( email )

65, Martin Place
Sydney, NSW 2000
Australia

Emanuel Moench

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany
+49 69 95662312 (Phone)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, D-60323
Germany

Goethe University Frankfurt - Research Center SAFE ( email )

Theodor-W.-Adorno-Platz 3
Frankfurt am Main, 60323
Germany

HOME PAGE: http://www.safe-frankfurt.de

Ca Foscari University of Venice ( email )

Dorsoduro 3246
Venice, Veneto 30123
Italy

Michael Schneider (Contact Author)

Deutsche Bundesbank

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

Scuola Normale Superiore ( email )

Piazza dei Cavalieri, 7
Pisa, 56126
Italy

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