Shadow Discounts

Tomy Lee, Isacco Lotti, Florian Nagler, Giorgio Ottonello and Chaojun Wang

No 21712, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: Centralized trading platforms should improve competition in OTC markets. Using transaction records from the U.S. corporate bond market and exploiting variation within client-dealer relationships, we find no evidence that clients receive better secondary market trading terms after adopting a platform. To reconcile this puzzling finding, we present a model in which relationship dealers operate in both primary and secondary markets. A central insight, for which we find strong empirical support, is that dealers respond to clients’ improved outside options not by changing secondary-market terms, but by granting larger primary-market allocations. Guided by the model, we estimate that platform adoption is worth 77% of clients’ pre-adoption profits from primary market allocations. Overall, the effects of platforms in OTC markets are more complex than previously thought.

Keywords: Otc markets; Relationships; Primary market; Secondary market (search for similar items in EconPapers)
JEL-codes: G10 G12 G22 (search for similar items in EconPapers)
Date: 2026-07
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