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OTC Discount

delete2025-09-01
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OA
AI
C
Calebe de Roure
E
Emanuel Moench
L
Loriana Pelizzon *
M
Michael Schneider
DOI：10.1287/mnsc.2022.00194delete
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Abstract

Abstract

En 中文
We document a pecking order of transaction costs in the interdealer market for German sovereign bonds, where three trading protocols coexist. Dealers can trade over the counter (OTC), either bilaterally or via brokers, as well as on an exchange. Trading on the exchange is more expensive than OTC, and broker-intermediated trades are more costly than bilateral OTC trades. The existence of an OTC discount is difficult to square with theories centered around search-and-bargaining frictions but is in line with models of hybrid markets based on information frictions. Consistently, we show that dealers' information impacts their choice of trading protocol and that the pecking order of transaction costs is aligned with the informational content of order flows across protocols. Search and bargaining as well as information proxies explain differences in OTC discount within protocols. A realistic description of hybrid markets thus requires both types of frictions.
Keywords:
market microstructure
hybrid markets
venue choice
interdealer brokerage
fixed income
OTC markets
search frictions
information frictions
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Journal

Management Science cover
Management Science
IF:
4.9
Papers:
780
Citations:
5.0W

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No organization information available