Relationship Trading in Over-the-Counter Markets |
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| Authors: | TERRENCE HENDERSHOTT DAN LI DMITRY LIVDAN NORMAN SCHÜRHOFF |
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| Institution: | 1. Terrence Hendershott is with the Walter A. Haas School of Business, University of California. Dan Li is with the Board of Governors of the Federal Reserve System. Dmitry Livdan is with the Walter A. Haas School of Business, University of California. Norman Schürhoff is with the Faculty of Business and Economics and Swiss Finance Institute, University of Lausanne. He is also a Research Fellow of the CEPR. Hendershott provides expert witness services to a variety of clients. He gratefully acknowledges support from the Norwegian Finance Initiative. Li and Livdan have no conflict of interest to disclose. Schürhoff gratefully acknowledges research support from the Swiss Finance Institute and the Swiss National Science Foundation under Sinergia project CRSII1_154445/1 “The Empirics of Financial Stability” and has no conflict of interest to disclose. We thank Philip Bond;2. the Editor;3. an associate editor;4. two anonymous referees;5. Darrell Duffie;6. Jerôme Dugast;7. Burton Hollifield;8. Haoxiang Zhu;9. and seminar audiences at California Polytechnic University, Carnegie Mellon University, FED Board, Higher School of Economics Moscow, IDC Herzliya, Imperial College, Johns Hopkins University, Michigan State University, National Bank of Belgium, NY FED, Rice University, Texas A&M University, University of British Columbia, University of Houston, University of Illinois-Chicago, University of Oklahoma, University of Piraeus, University of Wisconsin at Madison, University of Toronto, University of Victoria, WU Vienna, Einaudi Institute for Economics and Finance, 2015 Toulouse Trading and Post-Trading Conference, 2016 AFA, 2016 NBER AP Meeting, 2016 SFI Research Day, 12th Annual Central Bank of France Workshop on the Microstructure of Financial Markets, 2016 LAEF Conference on OTC Markets, 2017 13th Csef-Igier Symposium on Economics and Institutions, and 2017 OTC Markets and their Reform Conference in Rigi for valuable comments and 10. feedback. |
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| Abstract: | We examine the network of trading relationships between insurers and dealers in the over-the-counter (OTC) corporate bond market. Regulatory data show that one-third of insurers use a single dealer, whereas other insurers have large dealer networks. Execution prices are nonmonotone in network size, initially declining with more dealers but increasing once networks exceed 20 dealers. A model of decentralized trade in which insurers trade off the benefits of repeat business and faster execution quantitatively fits the distribution of insurers' network size and explains the price–network size relationship. Counterfactual analysis shows that regulations to unbundle trade and nontrade services can decrease welfare. |
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