Market transparency, liquidity externalities, and institutional trading costs in corporate bonds

Hendrik Bessembinder, William Maxwell, Kumar Venkataraman

Research output: Contribution to journalArticle

155 Scopus citations

Abstract

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.

Original languageEnglish (US)
Pages (from-to)251-288
Number of pages38
JournalJournal of Financial Economics
Volume82
Issue number2
DOIs
StatePublished - Nov 1 2006
Externally publishedYes

Keywords

  • Corporate bonds
  • Institutional trading costs
  • Market transparency

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics
  • Strategy and Management

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