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A Tale of Two Platforms: Dealer Intermediation in the European Sovereign Bond Market

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  • Dunne, Peter
  • Hau, Harald
  • Moore, Michael

Abstract

Interdealer trading in the European sovereign bond market is characterized by low spreads and high liquidity. This paper examines whether the dealer-customer segment of the market also benefits from low spreads. Customers are smaller banks and buy-side financial institutions who request quotes from primary dealers. They generally do not enjoy access to the interdealer trading platform. Surprisingly, we find that customer trades are on average competitively priced and often occur inside the interdealer spread. Moreover, higher market volatility increases interdealer spreads more than customer spreads. The theoretical part of the paper develops a new dynamic model of dealer intermediation which captures the segmented market structure of the European bond market. The model explains differences in the volatility dependence of interdealer and customer spreads. The predicted inventory dependence of customer trade quality is also confirmed in the data.

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Bibliographic Info

Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 6969.

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Date of creation: Sep 2008
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Handle: RePEc:cpr:ceprdp:6969

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Keywords: Adverse Selection; Dealer Intermediation; Market Segmentation; Spread Determination;

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References

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Citations

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Cited by:
  1. Guglielmo Maria Caporale & Alessandro Girardi & Paolo Paesani, 2010. "Quoted Spreads and Trade Imbalance Dynamics in the European Treasury Bond Market," Discussion Papers of DIW Berlin 1080, DIW Berlin, German Institute for Economic Research.
  2. Reitz, Stefan & Schmidt, Markus A. & Taylor, Mark P., 2009. "Financial intermediation and the role of price discrimination in a two-tier market," Discussion Paper Series 1: Economic Studies 2009,13, Deutsche Bundesbank, Research Centre.
  3. Schulz, Alexander & Wolff, Guntram B., 2009. "Sovereign bond market integration: the euro, trading platforms and financial crises," MPRA Paper 16900, University Library of Munich, Germany.
  4. Carol Osler & Alexander Mende & Lukas Menkhoff, 2010. "Price Discovery in Currency Markets," Working Papers 03, Brandeis University, Department of Economics and International Businesss School.
  5. Caporale, Guglielmo Maria & Girardi, Alessandro, 2013. "Price discovery and trade fragmentation in a multi-market environment: Evidence from the MTS system," Journal of Banking & Finance, Elsevier, vol. 37(2), pages 227-240.
  6. Paola Paiardini, 2010. "The Price Impact of Economic News, Private Information and Trading Intensity," Birkbeck Working Papers in Economics and Finance 1011, Birkbeck, Department of Economics, Mathematics & Statistics.

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