Size discount and size penalty: trading costs in bond markets

We show that larger trades incur lower trading costs in government bond markets (‘size discount’), but costs increase in trade size after controlling for clients’ identities (‘size penalty’). The size discount is driven by the cross‑client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within‑client variation, is larger for corporate bonds, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts.