A Tale of Two Platforms: Dealer Intermediation in the European Sovereign Bond Market

Peter Dunne (), Harald Hau () and Michael John Moore ()

No 6969, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: Interdealer trading in the European sovereign bond market is characterized by low spreads and high liquidity. This paper examines whether the dealer-customer segment of the market also benefits from low spreads. Customers are smaller banks and buy-side financial institutions who request quotes from primary dealers. They generally do not enjoy access to the interdealer trading platform. Surprisingly, we find that customer trades are on average competitively priced and often occur inside the interdealer spread. Moreover, higher market volatility increases interdealer spreads more than customer spreads. The theoretical part of the paper develops a new dynamic model of dealer intermediation which captures the segmented market structure of the European bond market. The model explains differences in the volatility dependence of interdealer and customer spreads. The predicted inventory dependence of customer trade quality is also confirmed in the data.

Keywords: Adverse Selection; Dealer Intermediation; Market Segmentation; Spread Determination (search for similar items in EconPapers)
JEL-codes: D4 G14 G2 G24 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-mst
Date: 2008-09
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