TY - JOUR
T1 - Market transparency, liquidity externalities, and institutional trading costs in corporate bonds
AU - Bessembinder, Hendrik
AU - Maxwell, William
AU - Venkataraman, Kumar
N1 - Funding Information:
The authors thank Yakov Amihud, Tihomir Asparouhova, Shmuel Baruch, Ekkehart Boehmer, Cliff Ball, Jeremy Graveline, Joel Hasbrouck, Mike Lemmon, Ananth Madhavan, Mark Shenkman, Hans Stoll, Rex Thompson, Christopher Vincent, Arthur Warga, an anonymous referee, and seminar participants at Vanderbilt University, the NBER Microstructure Conference, the University of Virginia, Claremont-McKenna College, Brigham Young University, Indiana University, Southern Methodist University, the University of Houston, the Stockholm School of Economics, the Northern Finance Association Meetings, and the University of Utah for valuable comments. Thanks are also due to Lehman Brothers and MarketAxess for the provision of data. The NAIC bond pricing data and Fixed Income Securities database are obtained from the Fixed Income Research Program of the Bauer College of Business at the University of Houston. The second author acknowledges financial support provided by Moody's Credit Market Research Fund. Earlier versions of this paper were titled “Optimal Market Transparency: Evidence from the Initiation of Trade Reporting in Corporate Bonds” and “Market Transparency and Institutional Trading Costs.”
Copyright:
Copyright 2006 Elsevier B.V., All rights reserved.
PY - 2006/11
Y1 - 2006/11
N2 - We develop a simple model of the effect of public transaction reporting on trade execution costs and test it using a sample of institutional trades in corporate bonds, before and after initiation of the TRACE reporting system. Trade execution costs fell approximately 50% for bonds eligible for TRACE transaction reporting, and 20% for bonds not eligible for TRACE reporting, suggesting the presence of a "liquidity externality." The key results are robust to changes in variables, such as interest rate volatility and trading activity that might also affect execution costs. Market shares and the cost advantage to large dealers decreased post-TRACE. These results indicate that market design can have first-order effects, even for sophisticated institutional customers.
AB - We develop a simple model of the effect of public transaction reporting on trade execution costs and test it using a sample of institutional trades in corporate bonds, before and after initiation of the TRACE reporting system. Trade execution costs fell approximately 50% for bonds eligible for TRACE transaction reporting, and 20% for bonds not eligible for TRACE reporting, suggesting the presence of a "liquidity externality." The key results are robust to changes in variables, such as interest rate volatility and trading activity that might also affect execution costs. Market shares and the cost advantage to large dealers decreased post-TRACE. These results indicate that market design can have first-order effects, even for sophisticated institutional customers.
KW - Corporate bonds
KW - Institutional trading costs
KW - Market transparency
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U2 - 10.1016/j.jfineco.2005.10.002
DO - 10.1016/j.jfineco.2005.10.002
M3 - Article
AN - SCOPUS:33749143202
SN - 0304-405X
VL - 82
SP - 251
EP - 288
JO - Journal of Financial Economics
JF - Journal of Financial Economics
IS - 2
ER -