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Shadow Discounts

Author

Listed:
  • Lee, Tomy
  • Lotti, Isacco
  • Nagler, Florian
  • Ottonello, Giorgio
  • Wang, Chaojun

Abstract

Centralized trading platforms should improve competition in OTC markets. Using transaction records from the U.S. corporate bond market and exploiting variation within client-dealer relationships, we find no evidence that clients receive better secondary market trading terms after adopting a platform. To reconcile this puzzling finding, we present a model in which relationship dealers operate in both primary and secondary markets. A central insight, for which we find strong empirical support, is that dealers respond to clients’ improved outside options not by changing secondary-market terms, but by granting larger primary-market allocations. Guided by the model, we estimate that platform adoption is worth 77% of clients’ pre-adoption profits from primary market allocations. Overall, the effects of platforms in OTC markets are more complex than previously thought.

Suggested Citation

  • Lee, Tomy & Lotti, Isacco & Nagler, Florian & Ottonello, Giorgio & Wang, Chaojun, 2026. "Shadow Discounts," CEPR Discussion Papers 21712, Centre for Economic Policy Research.
    • Handle: RePEc:cpr:ceprdp:21712
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    File URL: https://cepr.org/publications/DP21712
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    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G22 - Financial Economics - - Financial Institutions and Services - - - Insurance; Insurance Companies; Actuarial Studies

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