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Informed Trading and the Dynamics of Client-Dealer Connections in Corporate Bond Markets

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  • Robert Czech

    (Bank of England)

  • Gábor Pintér

    (Bank of England)

Abstract

Using a unique non-anonymous UK dataset, we show that clients in corporate bond markets outperform when they trade with more dealers. The effect is stronger for informationally sensitive clients, assets, and during informationally intensive periods including COVID-19. Identifying clients who simultaneously trade in government and corporate bonds reveals that connections have a larger and more persistent effect in the corporate bond market. Using a Kyle (1989)-type model, we show that both the degree of inter-dealer competition and the magnitude of private information could explain the strength of the performance-connection relation; only the latter mechanism is supported by the data.

Suggested Citation

  • Robert Czech & Gábor Pintér, 2020. "Informed Trading and the Dynamics of Client-Dealer Connections in Corporate Bond Markets," Discussion Papers 2032, Centre for Macroeconomics (CFM).
    • Handle: RePEc:cfm:wpaper:2032
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    Cited by:

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    2. Benjamin Gardner & Yesol Huh, 2024. "Information Friction in OTC Interdealer Markets," Finance and Economics Discussion Series 2024-040, Board of Governors of the Federal Reserve System (U.S.).
    3. Péter Kondor & Gábor Pintér, 2022. "Clients' Connections: Measuring the Role of Private Information in Decentralized Markets," Journal of Finance, American Finance Association, vol. 77(1), pages 505-544, February.
    4. Pinter, Gabor & Uslu, Semih, 2023. "Price formation in markets with trading delays," Bank of England working papers 1023, Bank of England.
    5. Simon Jurkatis & Andreas Schrimpf & Karamfil Todorov & Nicholas Vause, 2023. "Relationship discounts incorporate bond trading," BIS Working Papers 1140, Bank for International Settlements.

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    More about this item

    Keywords

    Informed Trading; Corporate Bonds; Client-Dealer Connections; Inter-Dealer Competition; COVID-19;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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