Pre-Trade Transparency in Over-the-Counter Markets

Abstract

Using bond transaction data from TRACE, we investigate the impact of pre-trade transparency on over-the-counter markets, and find that NYSE pre-trade transparency reduces US corporate bond transaction costs by 10 basis points. NYSE pre-trade transparent bonds also maintain smaller standard deviation in bid-ask spreads and institutional investors face smaller bid-ask spreads when trading the pre-trade transparent bonds, suggesting that pre-trade transparency tends to favor traders rather than dealers by enhancing traders’ bargaining capability. Pre-trade transparency increases bonds’ values, since bonds with the NYSE pre-trade transparency have significantly lower bond yields than bonds. Our findings are robust to endogeneity of firms’ bond listing decisions on NYSE.