Relationship Discounts in Corporate Bond Trading

40 Pages Posted: 23 Dec 2022

See all articles by Simon Jurkatis

Simon Jurkatis

Bank of England

Andreas Schrimpf

CREATES - Aarhus University; Bank for International Settlements (BIS) - Monetary and Economic Department

Karamfil Todorov

Bank for International Settlements

Nicholas Vause

Bank of England

Date Written: December 13, 2022

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

Suggested Citation

Jurkatis, Simon and Schrimpf, Andreas and Schrimpf, Andreas and Todorov, Karamfil and Vause, Nicholas, Relationship Discounts in Corporate Bond Trading (December 13, 2022). Available at SSRN: https://ssrn.com/abstract=4301416 or http://dx.doi.org/10.2139/ssrn.4301416

Simon Jurkatis (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

Andreas Schrimpf

CREATES - Aarhus University ( email )

School of Economics and Management
Building 1322, Bartholins Alle 10
DK-8000 Aarhus C
Denmark

Bank for International Settlements (BIS) - Monetary and Economic Department ( email )

Centralbahnplatz 2
CH-4002 Basel
Switzerland

Karamfil Todorov

Bank for International Settlements ( email )

Centralbahnplatz 2
Basel, Basel-Stadt 4002
Switzerland

Nicholas Vause

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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