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OTC Discount

Author

Listed:
  • Calebe de Roure

    (Reserve Bank of Australia, Sydney, New South Wales 2000, Australia)

  • Emanuel Moench

    (Department of Finance, Frankfurt School of Finance & Management, 60322 Frankfurt, Germany; and Centre for Economic Policy Research, 75007 Paris, France)

  • Loriana Pelizzon

    (Centre for Economic Policy Research, 75007 Paris, France; and Leibniz Institute for Financial Research SAFE, 60323 Frankfurt, Germany; and Department of Finance, Goethe University Frankfurt, 60323 Frankfurt, Germany; and Department of Economics, Ca’ Foscari University of Venice, 30121 Venice, Italy)

  • Michael Schneider

    (Leibniz Institute for Financial Research SAFE, 60323 Frankfurt, Germany; and Research Centre, Deutsche Bundesbank, 60325 Frankfurt, Germany)

Abstract

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.

Suggested Citation

  • Calebe de Roure & Emanuel Moench & Loriana Pelizzon & Michael Schneider, 2026. "OTC Discount," Management Science, INFORMS, vol. 72(6), pages 4633-4651, June.
    • Handle: RePEc:inm:ormnsc:v:72:y:2026:i:6:p:4633-4651
    DOI: 10.1287/mnsc.2022.00194
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