Dealer Spreads in the Corporate Bond Market: Agent vs. Market-Making Roles
52 Pages Posted: 12 Jan 2014 Last revised: 20 Jul 2021
Date Written: January 4, 2020
Abstract
We use the large proportion of “riskless-principal-trades” to investigate corporate bond dealer-spreads arising from dealers’ roles as agents or market-makers. We find that agent-related-spreads are comparable in magnitude to market-making-spreads, and consistent with liquidity-search and customer-interface-costs/benefits; while market-making-spreads are consistent with inventory/asymmetric-information costs. In particular, agent-related spreads are lower for likely automated electronically-executed trades with clearly lower search costs. Dealers also appear to benefit informationally through interfacing directly with customers, and post tighter spreads in non-automated settings. Our results show that earlier TRACE studies have typically underestimated average trading costs by ignoring the separate agent and market-making roles of dealers.
Keywords: dealer spreads, market-making costs, search costs, bond transaction costs
JEL Classification: G10, G14, G18
Suggested Citation: Suggested Citation