Riskless Principal Trades in Corporate Bond Markets

26 Pages Posted: 16 Oct 2020

See all articles by Lawrence Harris

Lawrence Harris

University of Southern California - Marshall School of Business - Finance and Business Economics Department; Institute for Quantitative Research in Finance (the Q-Group); Financial Economists Roundtable; Interactive Brokers, Inc. (IBKR)

Anindya Mehta

USC Marshall School of Business

Date Written: August 26, 2020

Abstract

We identify growth in riskless principal trades (“RPTs”) using TRACE corporate bond market trade data. An RPT is a brokered trade arranged by a dealer for which the dealer obtains compensation by marking up the price instead of charging a commission. Over the last 15 years, RPTs increased from 19% to 37% of all customer trades, while non-zero markups declined 43% on average, with most changes occurring recently. The growth in electronic trading systems undoubtedly explain these trends, but most traders cannot access these systems directly. Small changes to the bond market structure could further decrease investor transaction costs.

Keywords: Bond Market Liquidity, Transaction Costs, Riskless Principal Trades, Trade Throughs, Dealers, Brokers, Pre-Trade Transparency, Trace, Market Micro-structure

JEL Classification: : G12, G19, G24, G28

Suggested Citation

Harris, Lawrence and Mehta, Anindya, Riskless Principal Trades in Corporate Bond Markets (August 26, 2020). Available at SSRN: https://ssrn.com/abstract=3681652 or http://dx.doi.org/10.2139/ssrn.3681652

Lawrence Harris (Contact Author)

University of Southern California - Marshall School of Business - Finance and Business Economics Department ( email )

Marshall School of Business
Los Angeles, CA 90089
United States
213-740-6496 (Phone)
213-740-6650 (Fax)

Institute for Quantitative Research in Finance (the Q-Group) ( email )

Q Group
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HOME PAGE: http://www.q-group.org

Financial Economists Roundtable ( email )

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HOME PAGE: http://www.financialeconomistsroundtable.com/

Interactive Brokers, Inc. (IBKR) ( email )

209 South LaSalle Street
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Chicago, IL 60604
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Anindya Mehta

USC Marshall School of Business ( email )

701 Exposition Blvd, HOH 431
Los Angeles, CA California 90089-1424
United States
7327319190 (Phone)

HOME PAGE: http://marshall.usc.edu

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