Why Do Dealers Buy High and Sell Low? An Analysis of Persistent Crossing in Extremely Segmented Markets

Vladimir Atanasov, John J. MerrickJr. and Philipp Schuster

Review of Finance, 2017, vol. 21, issue 2, 719-760

Abstract: We find that small buy trades of US agency mortgage-backed securities (MBS) are priced 3–8% lower than large sell trades. No such “crossing” exists in corporate bonds and agency debentures. We attribute the MBS price patterns to impediments to position aggregation in combination with investor suitability rules that disproportionately affect retail-sized trading and show in a model that classic market frictions cannot produce crossing. Our findings imply that valuations placed on securities affected by aggregation and suitability frictions should adjust for position size. Such securities include not only agency MBS, but also asset-backed securities, commercial mortgage-backed securities, collateralized mortgage obligations, collateralized loan obligations, and private-label residential mortgage-backed securities.

Keywords: Mortgage-Backed Securities; Frictions; Crossing; Suitability; Fragmentation (search for similar items in EconPapers)
JEL-codes: G12 G21 G23 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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