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Market Structure and Transaction Costs of Index CDSs

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  • PIERRE COLLIN‐DUFRESNE
  • BENJAMIN JUNGE
  • ANDERS B. TROLLE

Abstract

Despite regulatory efforts to promote all‐to‐all trading, the post–Dodd‐Frank index credit default swap market remains two‐tiered. Transaction costs are higher for dealer‐to‐client than interdealer trades, but the difference is explained by the higher, largely permanent, price impact of client trades. Most interdealer trades are liquidity motivated and executed via low‐cost, low‐immediacy trading protocols. Dealer‐to‐client trades are nonanonymous; they almost always improve upon contemporaneous executable interdealer quotes, and dealers appear to price discriminate based on the perceived price impact of trades. Our results suggest that the market structure is a consequence of the characteristics of client trades: relatively infrequent, large, and differentially informed.

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  • Pierre Collin‐Dufresne & Benjamin Junge & Anders B. Trolle, 2020. "Market Structure and Transaction Costs of Index CDSs," Journal of Finance, American Finance Association, vol. 75(5), pages 2719-2763, October.
    • Handle: RePEc:bla:jfinan:v:75:y:2020:i:5:p:2719-2763
    DOI: 10.1111/jofi.12953
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    5. Scheicher, Martin, 2023. "Intermediation in US and EU bond and swap markets: stylised facts, trends and impact of the coronavirus (COVID-19) crisis in March 2020," ESRB Occasional Paper Series 24, European Systemic Risk Board.
    6. Babus, Ana & Hachem, Kinda, 2021. "Regulation and security design in concentrated markets," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 139-151.
    7. Rostek, Marzena, 2021. "Comments on “Regulation and security design in concentrated markets” by A. Babus and K. Hachem (2021)," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 152-154.
    8. de Roure, Calebe & Mönch, Emanuel & Pelizzon, Loriana & Schneider, Michael, 2019. "OTC discount," Discussion Papers 42/2019, Deutsche Bundesbank.
      • de Roure, Calebe & Mönch, Emanuel & Pelizzon, Loriana & Schneider, Michael, 2021. "OTC discount," SAFE Working Paper Series 298, Leibniz Institute for Financial Research SAFE, revised 2021.
    9. Wang, Xinjie & Zhong, Zhaodong (Ken), 2022. "Dealer inventory, pricing, and liquidity in the OTC derivatives markets: Evidence from index CDSs," Journal of Financial Markets, Elsevier, vol. 57(C).
    10. Difang Huang & Yubin Li & Xinjie Wang & Zhaodong (Ken) Zhong, 2022. "Does the Federal Open Market Committee cycle affect credit risk?," Financial Management, Financial Management Association International, vol. 51(1), pages 143-167, March.
    11. Gábor Pintér & Chaojun Wang & Junyuan Zou, 2021. "Size Discount and Size Penalty Trading Costs in Bond Markets," Discussion Papers 2114, Centre for Macroeconomics (CFM).
    12. Aquilina, Matteo & Ibikunle, Gbenga & Mollica, Vito & Steffen, Tom, 2022. "The visible hand: benchmarks, regulation, and liquidity," Journal of Financial Markets, Elsevier, vol. 61(C).
    13. Pintér, Gábor & Wang, Chaojun & Zou, Junyuan, 2022. "Information chasing versus adverse selection," Bank of England working papers 971, Bank of England.
    14. Jean‐Edouard Colliard & Thierry Foucault & Peter Hoffmann, 2021. "Inventory Management, Dealers' Connections, and Prices in Over‐the‐Counter Markets," Journal of Finance, American Finance Association, vol. 76(5), pages 2199-2247, October.
    15. Wang, Chaojun, 2023. "The limits of multi-dealer platforms," Journal of Financial Economics, Elsevier, vol. 149(3), pages 434-450.
    16. Jean-Edouard Colliard & Thierry Foucault & Peter Hoffmann, 2018. "Inventory Management, Dealers' Connections, and Prices in OTC Markets," Working Papers hal-01933855, HAL.
    17. Wang, Xinjie & (Ken) Zhong, Zhaodong, 2022. "Post-crisis regulations, market making, and liquidity in over-the-counter markets," Journal of Banking & Finance, Elsevier, vol. 134(C).

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