Market Structure and Transaction Costs of Index CDSs

Pierre Collin-Dufresne, Benjamin Junge and Anders B. Trolle
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Pierre Collin-Dufresne: Ecole Polytechnique Fédérale de Lausanne, Swiss Finance Institute, and National Bureau of Economic Research (NBER)
Benjamin Junge: Ecole Polytechnique Fédérale de Lausanne
Anders B. Trolle: HEC Paris

No 18-40, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Despite a regulatory effort to promote all-to-all trading, the post-Dodd-Frank index-CDS market remains two-tiered. Dealer-to-client trades have higher transaction costs than interdealer trades. The difference is entirely explained by the higher, largely permanent, price impact of client trades. However, transaction costs of interdealer trades vary significantly across trading protocols. Mid-market matching and workup -- both characterized by execution risk -- incur the smallest costs. Dealer-to-client trades typically execute well inside the spread quoted on the interdealer limit order book. Thus, clients who value immediacy could not improve execution with marketable interdealer orders. This may explain the endurance of the two-tiered market structure.

Keywords: CDX; Dodd-Frank Act; Market Structure; Transaction Costs; Swap Execution Facility; Trading Protocols; Workup (search for similar items in EconPapers)
JEL-codes: G12 G13 G14 G28 (search for similar items in EconPapers)
Pages: 123 pages
Date: 2018-06
New Economics Papers: this item is included in nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (4)

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