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Informed trading in a two-tier market structure under financial distress

Claudio Impenna and Paola Paiardini ()
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Claudio Impenna: Bank of Italy

Discussion Papers from Department of Economics, University of Birmingham

Abstract: The sovereign bond market has traditionally been the dominant segment of the euro area bond market and it is one of the largest in the world. Secondary market liquidity is an essential feature of a well-functioning and resilient government bond market. The secondary market of the European sovereign bonds is organised as a two-tier electronic market, with an inter-dealer and a dealer-to-customer segment. The previous literature uses a sequential trade model, to investigate the probability of informed trading (PIN) in the parallel trading of the same bond on these two venues, finding that the PIN is significantly lower in the dealer-to-customer segment than in the inter-dealer one. We contribute to the existing literature analysing this two-tier market for a longer period, which includes episodes of financial distress in the Eurozone and various ECB interventions to try to contain the crisis. We show that the crisis deeply affected the two segments of the market, reverting the conclusion about the presence of informed traders in the two platforms for some periods, and questioning the need for this trading structure and its stability.

Keywords: Market microstructure; Informed trading; Government bonds (search for similar items in EconPapers)
JEL-codes: G10 G12 G14 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-eec and nep-mst
Date: 2019-06
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