Relationship Discounts in Corporate Bond Trading
46 Pages Posted: 23 Dec 2022 Last revised: 9 Oct 2023
There are 2 versions of this paper
Relationship Discounts in Corporate Bond Trading
Relationship discounts in corporate bond trading
Date Written: October 6, 2023
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 enjoy transaction costs that are 51% lower than those of the median client—an effect which was particularly beneficial when transaction costs spiked during the COVID-19 turmoil. We find clients’ liquidity provision to be a key motive why dealers grant relationship discounts: clients to whom balance-sheet constrained dealers can turn as a source of liquidity are rewarded with relationship discounts. Another important motive for dealers to give discounts 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 bonds, COVID-19, Dealers, Over-the-counter markets, Trading relationships
JEL Classification: G12, G14, G23, G24
Suggested Citation: Suggested Citation