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The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market

Author

Listed:
  • Paul Asquith
  • Thom Covert
  • Parag Pathak

Abstract

In July 2002, FINRA began mandatory dissemination of price and volume information for corporate bond trades. This paper, using recently released data, measures transparency’s effect on trading activity and costs for the entire corporate bond market. Even though trading costs decrease significantly across all types of bonds, trading activity does not increase and, by one measure, decreases. Transparency affects high-yield bonds differently than investment grade bonds. High-yield bonds have the largest decrease in trading activity, 71.1%, and in trading costs, 22.9%. High-yield bonds also disproportionately contribute to the estimated reduction in total trading costs of $600 million a year.

Suggested Citation

  • Paul Asquith & Thom Covert & Parag Pathak, 2013. "The Effects of Mandatory Transparency in Financial Market Design: Evidence from the Corporate Bond Market," NBER Working Papers 19417, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:19417
    Note: AP CF
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    Cited by:

    1. Darrell Duffie, 2018. "Financial Regulatory Reform After the Crisis: An Assessment," Management Science, INFORMS, vol. 64(10), pages 4835-4857, October.
    2. Adrian, Tobias & Boyarchenko, Nina & Shachar, Or, 2017. "Dealer balance sheets and bond liquidity provision," Journal of Monetary Economics, Elsevier, vol. 89(C), pages 92-109.
    3. Bruno Biais & Richard Green, 2019. "The Microstructure of the Bond Market in the 20th Century," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 33, pages 250-271, July.
    4. Cereda, Fábio & Chague, Fernando & De-Losso, Rodrigo & Genaro, Alan & Giovannetti, Bruno, 2022. "Price transparency in OTC equity lending markets: Evidence from a loan fee benchmark," Journal of Financial Economics, Elsevier, vol. 143(1), pages 569-592.
    5. Anton Tsoy, 2016. "Liquidity and Prices in Decentralized Markets with Almost Public Information," 2016 Meeting Papers 8, Society for Economic Dynamics.
    6. Todorov, Karamfil, 2020. "Quantify the quantitative easing: Impact on bonds and corporate debt issuance," Journal of Financial Economics, Elsevier, vol. 135(2), pages 340-358.
    7. Nina Boyarchenko & Domenico Giannone & Or Shachar, 2018. "Flighty liquidity," Staff Reports 870, Federal Reserve Bank of New York.
    8. Vladimir Asriyan & William Fuchs & Brett Green, 2017. "Information Spillovers in Asset Markets with Correlated Values," American Economic Review, American Economic Association, vol. 107(7), pages 2007-2040, July.
    9. Alicia Vidler & Toby Walsh, 2024. "Modelling Opaque Bilateral Market Dynamics in Financial Trading: Insights from a Multi-Agent Simulation Study," Papers 2405.02849, arXiv.org.
    10. Roberto Baviera & Aldo Nassigh & Emanuele Nastasi, 2019. "A closed formula for illiquid corporate bonds and an application to the European market," Papers 1901.06855, arXiv.org, revised May 2020.
    11. Aramonte, Sirio & Szerszeń, Paweł J., 2020. "Cross-market liquidity and dealer profitability: Evidence from the bond and CDS markets," Journal of Financial Markets, Elsevier, vol. 51(C).
    12. Bonsall, Samuel B. & Gillette, Jacquelyn R. & Pundrich, Gabriel & So, Eric, 2024. "Conflicts of interest in subscriber-paid credit ratings," Journal of Accounting and Economics, Elsevier, vol. 77(1).
    13. O’ Hara, Maureen & Wang, Yihui & (Alex) Zhou, Xing, 2018. "The execution quality of corporate bonds," Journal of Financial Economics, Elsevier, vol. 130(2), pages 308-326.
    14. Mark Fedenia & Tavy Ronen & Seunghan Nam, 2024. "Machine learning and trade direction classification: insights from the corporate bond market," Review of Quantitative Finance and Accounting, Springer, vol. 63(1), pages 1-36, July.
    15. Goldstein, Michael A. & Hotchkiss, Edith S., 2020. "Providing liquidity in an illiquid market: Dealer behavior in US corporate bonds," Journal of Financial Economics, Elsevier, vol. 135(1), pages 16-40.
    16. Mike Anderson & René M. Stulz, 2017. "Is Post-Crisis Bond Liquidity Lower?," NBER Working Papers 23317, National Bureau of Economic Research, Inc.
    17. Marlene Amstad & Steven Kong & Frank Packer & Eli Remolona, 2016. "A spare tire for capital markets: Fostering corporate bond markets in Asia," BIS Papers, Bank for International Settlements, number 85, October –.
    18. Valseth, Siri, 2020. "Informed trading in hybrid bond markets," Global Finance Journal, Elsevier, vol. 44(C).
    19. Nejadmalayeri, Ali & Usman, Adam, 2022. "Real asset liquidity, cash holdings, and the cost of corporate debt," Global Finance Journal, Elsevier, vol. 53(C).
    20. Valseth, Siri, 2016. "Informed trading in Hybrid Bond Markets," UiS Working Papers in Economics and Finance 2016/13, University of Stavanger.
    21. Lee, Sukjoon, 2020. "Liquidity Premium, Credit Costs, and Optimal Monetary Policy," MPRA Paper 104825, University Library of Munich, Germany.

    More about this item

    JEL classification:

    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
    • L51 - Industrial Organization - - Regulation and Industrial Policy - - - Economics of Regulation

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