Quote Competition in Corporate Bonds
44 Pages Posted: 4 Feb 2022 Last revised: 12 Sep 2022
Date Written: December 4, 2021
Using data on indicative quotes dealers provide to clients, we establish empirical relationships regarding quote competition in the corporate bond market. Market-wide higher quoting activity is associated with greater trading volume and lower trading costs. At the dealer level, quoting dealers attract order flow with more and better quotes attracting more volume. These effects are larger when uncertainty is higher in terms of lower credit ratings and higher volatility, including the onset of Covid-19. Quote competition for order flow is associated with improved execution as clients receive better prices when more dealers quote and when clients trade with better quoting dealers. Our results are consistent with quote competition playing an important role in corporate bond trading.
Keywords: Pretrade transparency, quotes, corporate bonds, OTC markets, order flow competition
JEL Classification: G12, G14, G24
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