Electronic Bond Intermediation: Evidence from Corporate Bond ATSs

Abstract

We examine the trading and quoting behavior of dealers in the corporate bond market, using dealer quotation data from two major corporate bond ATSs. We find a clear pecking order of transaction costs in which central dealers offer the lowest transaction costs, followed by high-quoting dealers, then moderate-quoting dealers, and finally non-quoting dealers. We also find that ATSs provide a useful venue for inventory management, especially for dealers who do not possess as extensive bilateral trading networks as central dealers. Overall, our study contributes to broadening our understanding of electronic trading channels beyond the traditional voice trading channel and their implications on customer transaction costs in an important OTC market.

Keywords: Corporate bonds, network, centrality, liquidity provision, alternative trading systems, ATS, bond quotation, riskless principal trades

JEL Classification: G12, G14, G21, G23, G24