Size discount and size penalty: trading costs in bond markets

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 08 April 2022

Staff Working Paper No. 970

By Gábor Pintér, Chaojun Wang and Junyuan Zou

We show that larger trades incur lower trading costs in government bond markets (‘size discount’), but costs increase in trade size after controlling for clients’ identities (‘size penalty’). The size discount is driven by the cross‑client variation of larger traders obtaining better prices, consistent with theories of trading with imperfect competition. The size penalty, driven by the within‑client variation, is larger for corporate bonds, during major macroeconomic surprises and during Covid‑19. These differences are larger among more sophisticated clients, consistent with information‑based theories. The size penalty in US Treasuries is about three times as small as in UK gilts.

Size discount and size penalty: trading costs in bond markets