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

Hendrik Bessembinder, William Maxwell, Kumar Venkataraman

Research output: Contribution to journalArticle

148 Citations (Scopus)

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 2006
Externally publishedYes

Fingerprint

Liquidity
Trading costs
Market transparency
Corporate bonds
Institutional trading
Externalities
Execution costs
Market design
Trading activity
Order effects
Interest rate volatility
Costs
Market share
Dealers

Keywords

  • Corporate bonds
  • Institutional trading costs
  • Market transparency

ASJC Scopus subject areas

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

Cite this

Market transparency, liquidity externalities, and institutional trading costs in corporate bonds. / Bessembinder, Hendrik; Maxwell, William; Venkataraman, Kumar.

In: Journal of Financial Economics, Vol. 82, No. 2, 11.2006, p. 251-288.

Research output: Contribution to journalArticle

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