Quote Competition in Corporate Bonds

44 Pages Posted: 4 Feb 2022 Last revised: 12 Sep 2022

See all articles by Terrence Hendershott

Terrence Hendershott

University of California, Berkeley - Haas School of Business

Dan Li

Board of Governors of the Federal Reserve System

Dmitry Livdan

University of California, Berkeley

Norman Schürhoff

Swiss Finance Institute - HEC Lausanne

Kumar Venkataraman

Southern Methodist University (SMU) - Finance Department

Date Written: December 4, 2021

Abstract

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

Suggested Citation

Hendershott, Terrence J. and Li, Dan and Livdan, Dmitry and Schürhoff, Norman and Venkataraman, Kumar, Quote Competition in Corporate Bonds (December 4, 2021). SMU Cox School of Business Research Paper No. 22-03, Swiss Finance Institute Research Paper No. 22-70, Available at SSRN: https://ssrn.com/abstract=3982686 or http://dx.doi.org/10.2139/ssrn.3982686

Terrence J. Hendershott

University of California, Berkeley - Haas School of Business ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States

Dan Li

Board of Governors of the Federal Reserve System ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

Dmitry Livdan

University of California, Berkeley ( email )

545 Student Services Building, #1900
2220 Piedmont Avenue
Berkeley, CA 94720
United States
(510) 642-4733 (Phone)

Norman Schürhoff

Swiss Finance Institute - HEC Lausanne ( email )

Chavannes-près-Renens
Switzerland

Kumar Venkataraman (Contact Author)

Southern Methodist University (SMU) - Finance Department ( email )

United States
214-768-7005 (Phone)
214-768-4099 (Fax)

HOME PAGE: http://people.smu.edu/kumar/

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