Does market design contribute to market stability? Indications from a corporate bond exchange during the COVID-19 crisis

Abstract

The common practice worldwide is to trade corporate bonds over the counter (OTC). Conversely, in Israel bonds are traded on an exchange like stocks. We document that during the COVID-19 crisis, trading activity in the Israeli corporate bond market rose sharply despite a significant decrease in liquidity. It occurred without the need for any regulatory intervention. Our findings differ from the evidence on major OTC bond markets, where a liquidity crisis prompt central banks to intervene and ensure market stability. The patterns we document in the Israeli exchange-based bond market resemble to the evidence recorded in exchange-based equity markets worldwide. The findings indicate that trading mechanism may serve as a determinant of financial stability.