OTC Discount

de Roure, Calebe; Moench, Emanuel; Pelizzon, Loriana; Schneider, Michael

doi:10.2139/ssrn.3507679

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OTC Discount

Deutsche Bundesbank Discussion Paper No. 42/2019

69 Pages Posted: 20 Dec 2019

See all articles by Calebe de Roure

Emanuel Moench

Frankfurt School of Finance & Management; Centre for Economic Policy Research (CEPR)

Loriana Pelizzon

Goethe University Frankfurt - Faculty of Economics and Business Administration; Leibniz Institute for Financial Research SAFE; Ca Foscari University of Venice - Dipartimento di Economia

Michael Schneider

Deutsche Bundesbank; Goethe University Frankfurt

There are 2 versions of this paper

Date Written: November 6, 2019

Abstract

We study price dispersion and venue choice in the interdealer market for German sovereign bonds, where an exchange and over-the-counter segments coexist. We show that 85% of OTC traded prices are favorable with respect to exchange quotes, indicating the prevalence of an OTC discount. This discount is sizeable and driven by both search and information frictions. More than 75% of volume is transacted via interdealer brokers in trades that are larger, have less price impact, and less discount than comparable bilateral OTC trades. Dealers trade on the exchange for immediacy, highlighting the complementary roles played by the different segments.

Keywords: Market Microstructure,Hybrid Markets,Venue Choice,Interdealer Brokerage,Fixed-Income,OTC Markets,Intermediation Frictions,Search Frictions,Information Frictions

JEL Classification: D4,D47,G1,G14,G24

Suggested Citation: Suggested Citation

de Roure, Calebe and Moench, Emanuel and Pelizzon, Loriana and Schneider, Michael, OTC Discount (November 6, 2019). Deutsche Bundesbank Discussion Paper No. 42/2019, Available at SSRN: https://ssrn.com/abstract=3507679 or http://dx.doi.org/10.2139/ssrn.3507679