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Informed trading and the dynamics of client-dealer connections in corporate bond markets

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  • Czech, Robert

    (Bank of England)

  • Pintér, Gábor

    (Bank of England)

Abstract

Using a unique regulatory dataset with disclosed counterparty identities, we show that clients in corporate bond markets outperform when they trade with more dealers. The effect is stronger for informationally sensitive clients, assets, and during informationally intensive periods including Covid-19. Identifying clients who simultaneously trade in government and corporate bonds reveals that connections have larger and more persistent effects in the corporate bond market. Using a Kyle (1989)-type model, we show that both the degree of inter-dealer competition and the magnitude of private information could explain the strength of the performance-connection relation; we find stronger empirical evidence for an information-based mechanism.

Suggested Citation

  • Czech, Robert & Pintér, Gábor, 2020. "Informed trading and the dynamics of client-dealer connections in corporate bond markets," Bank of England working papers 895, Bank of England, revised 20 Jan 2022.
    • Handle: RePEc:boe:boeewp:0895
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    Cited by:

    1. Péter Kondor & Gábor Pintér, 2022. "Clients' Connections: Measuring the Role of Private Information in Decentralized Markets," Journal of Finance, American Finance Association, vol. 77(1), pages 505-544, February.
    2. Simon Jurkatis & Andreas Schrimpf & Karamfil Todorov & Nicholas Vause, 2023. "Relationship discounts incorporate bond trading," BIS Working Papers 1140, Bank for International Settlements.
    3. Gábor Pintér & Chaojun Wang & Junyuan Zou, 2021. "Size Discount and Size Penalty Trading Costs in Bond Markets," Discussion Papers 2114, Centre for Macroeconomics (CFM).
    4. Simon Jurkatis & Andreas Schrimpf & Karamfil Todorov & Nicholas Vause, 2023. "Relationship discounts incorporate bond trading," BIS Working Papers 1140, Bank for International Settlements.
    5. Pinter, Gabor & Uslu, Semih, 2023. "Price formation in markets with trading delays," Bank of England working papers 1023, Bank of England.

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    More about this item

    Keywords

    Informed trading; corporate bonds; client-dealer connections; inter-dealer competition; Covid-19;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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