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Transaction Costs, Trade Throughs, and Riskless Principal Trading in Corporate Bond Makets – USC Marshall School of Business (Larry Harris)

USCLarryThis study analyzes the costs of trading bonds using previously unexamined quotations data consolidated across several electronic bond trading venues. Much bond market trading is now electronic, but the benefits largely accrue to dealers because their customers often do not trade at the best available prices. Download PDF

 

 

Comments
  • StingerSeptember 20, 2015"The amount of research and analysis done to support this paper is impressive. Having done some analysis of trace and quoting data (albeit not to this extent), I do share some of the views (as well as some of the frustrations) around how to assemble what seems like a good indication of how trades have been executed and at what price. However I do not share the author conclusions, as I feel most of his points seem to be broad strokes based on non conclusive data sources…"
  • Merlin
    MerlinSeptember 19, 2015"I was going to take a pass on this one because the paper deserves a lot more attention than I am able to give it right now but Wolfman hit a chord with me. What good is having a 'fairer' price dissemination method if there are no prices to disseminate? In other words, take all of the profit out of it and the price makers go away and you are left with an even more illiquid market. Sure, you can argue that the largest most liquid issues could still transact this way and…"
  • Wolfman
    WolfmanSeptember 18, 2015"I will openly admit that I have not analyzed this paper as closely as the effort put into preparing demands. That said, it leaves me with this nagging question. Why is it that the credit market is continually compared to the equities markets? Is a consolidated quote mechanism the only real difference that has stymied the advancement of the electronic trading in credit? Information asymmetry is the mechanism by which most service companies generate revenue. Technology…"
  • Charlie
    CharlieSeptember 17, 2015"The authors have clearly done a lot of analysis as I have only skimmed the article and my experience is in the institutional market I found myself disagreeing from page 1! Perhaps the authors points are actually more related to practices in retail / mid market? Irrespective of institutional or retail I found myself thoughout this thought provoking paper asking ‘what does the FINRA rule book say?’ It would be fascinating to put all the practices discussed in the contex…"

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5 Comments on "Transaction Costs, Trade Throughs, and Riskless Principal Trading in Corporate Bond Makets – USC Marshall School of Business (Larry Harris)"

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Goose
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Goose is in agreement with the author that there is plenty of shenanigans in the retail markets, and the main culprit is the asymmetrical information individuals, and to a lesser extent dealers, have access to. I was just poking around on my 2 online accounts, and there are plenty of instances where the best bid/offer are materially different, and there are bids/offers in the stack that aren’t in one or the other. I did the same practice when I had an account at a large wirehouse, and the comparison was dramatically worse. “The bond markets would benefit greatly from having… Read more »
Charlie
Guest
The authors have clearly done a lot of analysis as I have only skimmed the article and my experience is in the institutional market I found myself disagreeing from page 1! Perhaps the authors points are actually more related to practices in retail / mid market? Irrespective of institutional or retail I found myself thoughout this thought provoking paper asking ‘what does the FINRA rule book say?’ It would be fascinating to put all the practices discussed in the context of today’s regulations. For example the distinction of principal vs agent is key and to me very clear in the… Read more »
Wolfman
Guest
I will openly admit that I have not analyzed this paper as closely as the effort put into preparing demands. That said, it leaves me with this nagging question. Why is it that the credit market is continually compared to the equities markets? Is a consolidated quote mechanism the only real difference that has stymied the advancement of the electronic trading in credit? Information asymmetry is the mechanism by which most service companies generate revenue. Technology has destroyed many service businesses as it eliminated information asymmetry from that business (ask any travel agent or cold call stock broker) but it… Read more »
Merlin
Guest
I was going to take a pass on this one because the paper deserves a lot more attention than I am able to give it right now but Wolfman hit a chord with me. What good is having a ‘fairer’ price dissemination method if there are no prices to disseminate? In other words, take all of the profit out of it and the price makers go away and you are left with an even more illiquid market. Sure, you can argue that the largest most liquid issues could still transact this way and that retail will get better fills but… Read more »
Stinger
Guest
The amount of research and analysis done to support this paper is impressive. Having done some analysis of trace and quoting data (albeit not to this extent), I do share some of the views (as well as some of the frustrations) around how to assemble what seems like a good indication of how trades have been executed and at what price. However I do not share the author conclusions, as I feel most of his points seem to be broad strokes based on non conclusive data sources. For instance, an assessment that with RFTs, typically the BD trades with another… Read more »
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