OTC Discount

We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vast ma- jority of OTC prices are favorable compared to exchange quotes. This is a challenge for theories of OTC markets centered around search-and-bargaining frictions but consistent with models of hybrid markets based on information frictions. We find sup- port for this explanation. Distinguishing between bilateral and broker-intermediated OTC trades, differences in OTC discount across protocols are consistent with their relative informedness. Within each protocol, the difference in OTC discount is explained not only by information but also by search-and-bargaining frictions.

Keywords: Market Microstructure, Hybrid Markets, Venue Choice, Interdealer Brokerage, Fixed-Income, OTC Markets, 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 (September 9, 2021). SAFE Working Paper No. 298, Available at SSRN: https://ssrn.com/abstract=3744758 or http://dx.doi.org/10.2139/ssrn.3744758