The Effects of Transparency on Trading Profits and Price Informativeness: Evidence From Corporate Bonds
35 Pages Posted: 12 Dec 2018
Date Written: November 18, 2018
This paper examines the effects of post-trade price transparency on the allocation of trading surplus in the corporate bond market. Using the introduction of TRACE as a natural experiment, we show that dealer profits are unconditionally lower when trade prices are disseminated. However, conditional on facing a customer imbalance, dealers perform better when trades are published because they can use that information to adjust prices more quickly to their future level. We provide evidence that prices are less informative after TRACE, consistent with price transparency reducing incentives for informed traders to participate in the market.
Keywords: over-the-counter markets, price transparency, corporate bonds
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation