Customer Liquidity Provision in Corporate Bond Markets: Electronic Trading versus Dealer Intermediation
44 Pages Posted: 21 Jul 2021
Date Written: July 11, 2021
We investigate electronic trading among customers under normal market conditions and during the Covid-19 crisis using a unique data sample of U.S. corporate bond transactions from UBS Bond Port. We show that electronic customer-to-customer (C-to-C) trading is beneficial in terms of costs for orders up to $ 1 million. The advantage of electronic C-to-C trading primarily benefits liquidity-consuming customers, as dealers penalize liquidity takers more than the electronic trading channel. Contrary to expectations, at the onset of the Covid-19 crisis the costs for liquidity takers selling bonds electronically inverted, resulting in negative aggressor markups. We argue that this effect is allocated to the trading protocol of a firm and transparent order book. Volumes in electronic C-to-C trading are more driven by orders wherein the liquidity-consuming party is selling; this effect is amplified in stressed markets. Whereas electronic liquidity provision by dealers is primarily concentrated to normal market conditions, electronic C-to-C trading becomes more important in stressed markets. Literature underestimates the effect of inverting markups during the Covid-19 crisis and thus undervalues electronic C-to-C trading as a viable liquidity pool in stressed markets.
Keywords: Corporate Bonds, Electronic Trading, Customer-to-Customer, Dealer-Intermediation, COVID-19, Customer Liquidity Provision, Riskless Principal Trading, Aggressor, Liquidity Maker
JEL Classification: G10, G12, G14, G24
Suggested Citation: Suggested Citation