Dealer Spreads in the Corporate Bond Market: Agent vs. Market-Making Roles

52 Pages Posted: 12 Jan 2014 Last revised: 20 Jul 2021

See all articles by Louis H. Ederington

Louis H. Ederington

University of Oklahoma - Division of Finance

Wei Guan

University of South Florida St. Petersburg

Pradeep K. Yadav

University of Oklahoma Price College of Business

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

Ederington, Louis H. and Guan, Wei and Yadav, Pradeep K., Dealer Spreads in the Corporate Bond Market: Agent vs. Market-Making Roles (January 4, 2020). Available at SSRN: https://ssrn.com/abstract=2378000 or http://dx.doi.org/10.2139/ssrn.2378000

Louis H. Ederington

University of Oklahoma - Division of Finance ( email )

Norman, OK 73019
United States
405-325-5591 (Phone)
405-325-7688 (Fax)

Wei Guan

University of South Florida St. Petersburg ( email )

College of Business
140 Seventh Avenue South
St. Petersburg, FL 33701-5016
United States
(727) 873-4945 (Phone)
(727) 873-4192 (Fax)

Pradeep K. Yadav (Contact Author)

University of Oklahoma Price College of Business ( email )

307 W.Brooks, Room 3270 Division of Finance
Norman, OK 73019
United States
4053255591 (Phone)
4053255491 (Fax)

HOME PAGE: http://www.ou.edu/price/finance/faculty/pradeep_yadav.html

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