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Informed trading in Hybrid Bond Markets

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  • Valseth, Siri

    (UiS)

Abstract

This paper investigates whether establishing an electronic limit order book (LOB) in a current over-the-counter (OTC) bond market will move the price discovery process onto the new venue and if so, whether informed traders supply or demand liquidity. A detailed data set from the hybrid Norwegian government bond market shows that informed dealers prefer market orders in the LOB. The results further show that uninformed dealers tend to provide liquidity to informed dealers. Informed dealers’ preference for speed can reflect that limit orders and OTC trading are exposed to waiting costs which can be substantial in many bond markets. These findings suggest that recently proposed pre-trade transparency requirements will contribute to a more effcient price discovery process in current OTC bond markets and that an incentive scheme for liquidity suppliers could enhance it further.

Suggested Citation

  • Valseth, Siri, 2016. "Informed trading in Hybrid Bond Markets," UiS Working Papers in Economics and Finance 2016/13, University of Stavanger.
    • Handle: RePEc:hhs:stavef:2016_013
    as

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    References listed on IDEAS

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    More about this item

    Keywords

    Bonds; informed dealers; order flow;
    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
    • G17 - Financial Economics - - General Financial Markets - - - Financial Forecasting and Simulation

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