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Relationship discounts incorporate bond trading

Author

Listed:
  • Simon Jurkatis
  • Andreas Schrimpf
  • Karamfil Todorov
  • Nicholas Vause

Abstract

We find that clients with stronger past trading relationships with a dealer receive consistently better prices in corporate bond trading. The top 1% of relationship clients enjoy transaction costs that are 51% lower than those of the median client - an effect which was particularly beneficial when transaction costs spiked during the COVID-19 turmoil. We find clients' liquidity provision to be a key motive why dealers grant relationship discounts: clients to whom balance-sheet constrained dealers can turn as a source of liquidity are rewarded with relationship discounts. Another important motive for dealers to give discounts to relationship clients is because these clients generate the bulk of dealers' profits. Finally, we find no evidence that extraction of information from clients' order flow is related to relationship discounts.

Suggested Citation

  • Simon Jurkatis & Andreas Schrimpf & Karamfil Todorov & Nicholas Vause, 2023. "Relationship discounts incorporate bond trading," BIS Working Papers 1140, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1140
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    References listed on IDEAS

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    More about this item

    Keywords

    corporate bonds; Covid-19; dealers; over-the-counter markets; trading relationships;
    All these keywords.

    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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