Riskless Principal Trades in Corporate Bond Markets

Abstract

We identify growth in riskless principal trades (“RPTs”) using TRACE corporate bond market trade data. An RPT is a brokered trade arranged by a dealer for which the dealer obtains compensation by marking up the price instead of charging a commission. Over the last 15 years, RPTs increased from 19% to 37% of all customer trades, while non-zero markups declined 43% on average, with most changes occurring recently. The growth in electronic trading systems undoubtedly explain these trends, but most traders cannot access these systems directly. Small changes to the bond market structure could further decrease investor transaction costs.

Keywords: Bond Market Liquidity, Transaction Costs, Riskless Principal Trades, Trade Throughs, Dealers, Brokers, Pre-Trade Transparency, Trace, Market Micro-structure

JEL Classification: : G12, G19, G24, G28