Journal
REVIEW OF FINANCE
Volume 22, Issue 4, Pages 1413-1440Publisher
OXFORD UNIV PRESS
DOI: 10.1093/rof/rfx054
Keywords
Corporate bonds; Trading costs; Retail investors; Short-term investors; Bid-ask spreads; Liquidity
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Funding
- Maurice Falk Institute for Economic Research in Israel
- Jeremy Coller Foundation
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We investigate the trading of corporate bonds (c-bonds) by an open limit order book (LOB) mechanism. To do so, we use the case of the Tel Aviv Stock Exchange (TASE) as a laboratory, in which both stocks and c-bonds are traded by an LOB mechanism. Contrary to the OTC market in the USA, the TASE c-bond market is liquid with narrow spreads and low price dispersion. The short-term traders (STT), who are the analog of the market makers in the LOB, have small trading rents and unconcentrated activity (a low Herfindahl index). In the cross-section of bonds, the low concentration is related to low spreads, low price dispersion, and small STT rents. The non-STT [including retail investors (RIs), whose participation is significant] competes with the STT on quotation and tends to tighter quotes. RIs' activity contributes to narrower spreads.
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