Relationship discounts in corporate bond trading

Staff working papers set out research in progress by our staff, with the aim of encouraging comments and debate.
Published on 03 November 2023

Staff Working Paper No. 1,049

By Simon Jurkatis, Andreas Schrimpf, Karamfil Todorov and Nicholas Vause

We find that clients with stronger past trading relationships with a dealer receive consistently better prices in corporate bond trading. The top 1% of relationship clients enjoy transaction costs that are 51% lower than those of the median client – an effect which was particularly beneficial when transaction costs spiked during the Covid-19 turmoil. We find clients’ liquidity provision to be a key motive why dealers grant relationship discounts: clients to whom balance-sheet constrained dealers can turn as a source of liquidity are rewarded with relationship discounts. Another important motive for dealers to give discounts to relationship clients is because these clients generate the bulk of dealers’ profits. Finally, we find no evidence that extraction of information from clients’ order flow is related to relationship discounts.