Relationship Discounts in Corporate Bond Trading

Abstract

We find that clients with stronger past trading relationships with a dealer receive consistently better prices in corporate bond trading. The top 1% of relationship clients face a sizeable 67% drop in transaction costs relative to the median client—an effect which is particularly strong during the COVID-19 turmoil. We find clients’ liquidity provision to be a key driver of relationship discounts: clients to whom dealers can turn to as a source of liquidity, are rewarded with relationship discounts. Another important motive for dealers to quote better prices to relationship clients is because these clients generate the bulk of dealers’ profits. Finally, we find no evidence that extraction of information from clients’ order flow is related to relationship discounts.

Keywords: Corporate bond, COVID-19, Dealer, Over-the-counter financial market, Trading relationship

JEL Classification: G12, G14, G23, G24