Adverse-Selection Considerations in the Market-Making of Corporate Bonds

41 Pages Posted: 26 Jul 2018

See all articles by George Chalamandaris

George Chalamandaris

Athens University of Economics and Business - Department of Accounting and Finance

Nikos Vlachogiannakis

Bank of Greece

Date Written: July 5, 2018

Abstract

We examine the presence of adverse selection considerations in the market-making of corporate bonds. We find that institutional-sized customer trades are more informative than retail-sized ones. Dealers seem aware of the informational asymmetry between the two customer segments, as they update their quotes with greater intensity after days dominated by institutional-sized orders. Despite the lower adverse-selection risk they pose to market-makers, we also find that retail customers are charged relatively higher transaction costs, perhaps because of their low bargaining power. Our evidence suggests that a significant portion of the dealers’ profits stems from their ability to exploit efficiently the arrival of public information.

Keywords: adverse selection; institutional customers; retail customers; order size; corporate bonds; market-making; public information trading

JEL Classification: G12, G14, D53, D82

Suggested Citation

Chalamandaris, George and Vlachogiannakis, Nikos, Adverse-Selection Considerations in the Market-Making of Corporate Bonds (July 5, 2018). Available at SSRN: https://ssrn.com/abstract=3209196 or http://dx.doi.org/10.2139/ssrn.3209196

George Chalamandaris (Contact Author)

Athens University of Economics and Business - Department of Accounting and Finance ( email )

76 Patission Street
GR-104 34 Athens
Greece

Nikos Vlachogiannakis

Bank of Greece ( email )

21 E. Venizelos Avenue
GR 102 50 Athens
Greece

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