Informed trading and the dynamics of client-dealer connections in corporate bond markets

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 27 November 2020

Staff Working Paper No. 895

By Robert Czech and Gábor Pintér

Using a unique regulatory dataset with disclosed counterparty identities, we show that clients in corporate bond markets outperform when they trade with more dealers. The effect is stronger for informationally sensitive clients, assets, and during informationally intensive periods including Covid-19. Identifying clients who simultaneously trade in government and corporate bonds reveals that connections have larger and more persistent effects in the corporate bond market. Using a Kyle (1989)-type model, we show that both the degree of inter-dealer competition and the magnitude of private information could explain the strength of the performance-connection relation; we find stronger empirical evidence for an information-based mechanism.

This version was updated in January 2022.

 
Informed trading and the dynamics of client-dealer connections in corporate bond markets