OTC Discount

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

doi:10.2139/ssrn.3744758

OTC Discount

SAFE Working Paper No. 298

81 Pages Posted: 8 Dec 2020

See all articles by Calebe de Roure

Emanuel Moench

Deutsche Bundesbank; Goethe University Frankfurt - Department of Money and Macroeconomics

Loriana Pelizzon

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

Michael Schneider

Deutsche Bundesbank

There are 2 versions of this paper

Date Written: December 7, 2020

Abstract

We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vast majority of OTC prices are favorable with respect to exchange quotes. This is a challenge for theories of OTC markets centered around search frictions but consistent with models of hybrid markets based on information frictions. We show empirically that proxies for both frictions determine variation in the discount, which is largely passed on to customers. Dealers trade on the exchange for immediacy and via brokers for opacity and anonymity, highlighting the complementary roles played by the different protocols.

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 (December 7, 2020). SAFE Working Paper No. 298, Available at SSRN: https://ssrn.com/abstract=3744758 or http://dx.doi.org/10.2139/ssrn.3744758