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Market Structure and Transaction Costs of Index CDSs

Author

Listed:
  • Pierre Collin-Dufresne

    (Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and National Bureau of Economic Research (NBER))

  • Benjamin Junge

    (Ecole Polytechnique Fédérale de Lausanne)

  • Anders B. Trolle

    (HEC Paris)

Abstract

Despite a regulatory effort to promote all-to-all trading, the post-Dodd-Frank index-CDS market remains two-tiered. Dealer-to-client trades have higher transaction costs than interdealer trades. The difference is entirely explained by the higher, largely permanent, price impact of client trades. However, transaction costs of interdealer trades vary significantly across trading protocols. Mid-market matching and workup -- both characterized by execution risk -- incur the smallest costs. Dealer-to-client trades typically execute well inside the spread quoted on the interdealer limit order book. Thus, clients who value immediacy could not improve execution with marketable interdealer orders. This may explain the endurance of the two-tiered market structure.

Suggested Citation

  • Pierre Collin-Dufresne & Benjamin Junge & Anders B. Trolle, 2018. "Market Structure and Transaction Costs of Index CDSs," Swiss Finance Institute Research Paper Series 18-40, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1840
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    2. Riggs, Lynn & Onur, Esen & Reiffen, David & Zhu, Haoxiang, 2020. "Swap trading after Dodd-Frank: Evidence from index CDS," Journal of Financial Economics, Elsevier, vol. 137(3), pages 857-886.
    3. Ferrara, Gerardo & Kim, Jun Sung & Koo, Bonsoo & Liu, Zijun, 2021. "Counterparty choice in the UK credit default swap market: An empirical matching approach," Economic Modelling, Elsevier, vol. 94(C), pages 58-74.
    4. Hugues Dastarac, 2020. "Market Making and Proprietary Trading in the US Corporate Bond Market," Working papers 754, Banque de France.

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    More about this item

    Keywords

    CDX; Dodd-Frank Act; Market Structure; Transaction Costs; Swap Execution Facility; Trading Protocols; Workup;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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