Exchange-Traded Funds and Transparency in Over-the-Counter Markets
60 Pages Posted: 23 Nov 2020 Last revised: 19 Dec 2024
Date Written: April 10, 2020
Abstract
This paper explores a new channel through which exchange-traded funds (ETFs) can affect underlying asset prices. In over-the-counter markets, daily disclosure of ETF portfolio holdings increases price transparency and thereby retail investors' bargaining power. I show that ETF-held municipal bonds have significantly lower dealer markups than observationally similar non-ETF-held bonds. This effect cannot be explained by bond selection or ETFs' own trading activity. Rather, ETFs' disclosure of end-of-day bond pricing is associated with lower retail markups by 5-9 basis points.
Keywords: market transparency, information asymmetry, dealer markups, municipal bonds, over-the-counter markets, exchange-traded funds
JEL Classification: G12, G14, G23
Suggested Citation: Suggested Citation