Bundling Trades In Over-The-Counter Markets

In the canonical view of over-the-counter markets, dealers intermediate single-asset trades one at a time. We study a complementary role: when investors trade several assets at once, dealers absorb the joint position into inventory, insuring against execution risk. Using data on the near-universe of Canadian fixed-income trades, we find that bundled transactions account for 20 percent of investor volume. We develop a simple model of why, when, where, and at what prices investors bundle, and use it to explain three patterns. Switches—a purchase paired with a sale—transact at a discount, while uni-directional bundles—all buys or sells—transact at a premium, because a switch’s legs hedge within the dealer’s book while a uni-directional bundle’s compound. Bundling rises with volatility, when insurance against execution risk is most valuable, and the two types sort asymmetrically across bilateral and electronic venues. Together, these patterns reveal a dimension of intermediation the single-asset view overlooks, and one likely to grow in importance.