Anthony Saunders, Anand Srinivasan, Ingo Walter
ABSTRACT
This is the first exploratory field study of the U.S. inter-dealer OTC
corporate bond market. We do this by analyzing the trades of a major bond
dealer and through interviews with personnel at the trading desk of this
dealer. We document the competitive structure of the market in terms of
the number of active dealers, the mechanism used to facilitate trades etc.
We find that the mechanism of trading closely resembles a first price
sealed bid auction. The number of active dealers is quite small - only 9
dealers account for a large fraction of the trades. We examine potential
differences between different segments of the market. We develop a measure
of competition for this bidding market based on the theory of auctions.
This is the difference between the best and second best bid in a given
trade. Our measure of competition indicates that competition is highest in
US investment grade corporate bonds and lowest in junk bonds. We also
examine the effect of size of the trade on this measure of competition.
Surprisingly, large trades do not suffer from any adverse market impact.
Lastly, we examine the effect of exclusion of individual bidders on the
level of competition. The effect does not appear very large.
Saunder: (212) 998-0711 asaunder@stern.nyu.edu
Srinivasan: asriniva@stern.nyu.edu
Walter: (212) 998-0707 iwalter@stern.nyu.edu
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