OTC Discount

Abstract

We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vast majority of OTC prices are favorable compared to exchange quotes. This is a challenge for theories of OTC markets centered around search-and-bargaining frictions but consistent with models of hybrid markets based on information frictions. We find support for this explanation. Distinguishing between bilateral and broker-intermediated OTC trades, di↵erences in OTC discount across protocols are consistent with their relative informedness. Within each protocol, the di↵erence in OTC discount is explained not only by information but also by search-and-bargaining frictions.

Centralizing Over-the-Counter Markets?

“…Our findings differ from De Roure et al (2020), who document an OTC discount in the market for German government bonds.…”

“…The U.S., for example, began collecting trade-level data in mid-2017 but does not make it accessible to academics. Some countries granted access to data on parts of their Treasury market (Dunne et al (2015); Monias et al (2017); Kondor and Pintér (2019); De Roure et al (2020)). 2 can enter the platform to run an auction among dealers.…”