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Effect of Trading Relationships on Execution Costs in Low-Information-Asymmetry Over-the-Counter Markets

Published online by Cambridge University Press:  12 November 2018

George Issa  and
Elvis Jarnecic
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Abstract

Traders can reduce search costs in dealership markets by entering relationships with dealers. However, dealers draw little informational benefit from these relationships in Treasury markets, due to low risk and information asymmetry. We investigate the extent, duration, effects on pricing, and potential benefits of client–dealer relationships. We find that relationship strength leads to higher execution costs for clients, more so during stressed market conditions but less so in the presence of information asymmetry and when trading in corporate bonds. Relationship traders are compensated with immediacy at times when search is costly.

Type
Research Article
Information
Journal of Financial and Quantitative Analysis , Volume 54 , Issue 6 , December 2019 , pp. 2605 - 2634
Copyright
Copyright © Michael G. Foster School of Business, University of Washington 2018 

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Footnotes

1

We thank Hendrik Bessembinder (the editor), Jaksa Cvitanic, Darrell Duffie, Priyank Gandhi, Michael Goldstein, Tom McInish, Oliver Randall, Norman Schürhoff (the referee), Marti Subrahmanyam, Suresh Sundaresan, Pierre-Olivier Weill, and Haoxiang Zhu and participants at the International Financial Management Association (IFMA) 2015 World Finance & Banking Symposium and the 2016 Conference of the Financial Engineering & Banking Society for their useful comments and suggestions. We also thank the Australian Securities Exchange (ASX) for the provision of data, Wayne Jordan and Peter van Steensel of the ASX, and the Capital Markets CRC Limited (CMCRC) for their financial support.

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