Market Structure and Transaction Costs of Index CDSs

Despite a regulatory effort to promote all-to-all trading, the post-Dodd-Frank index-CDS market remains two-tiered. Dealer-to-client trades have higher transaction costs than interdealer trades. The difference is entirely explained by the higher, largely permanent, price impact of client trades. How...

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Bibliographic Details
Published inIDEAS Working Paper Series from RePEc
Main Authors Collin-Dufresne, Pierre, Junge, Benjamin, Trolle, Anders B
Format Paper
LanguageEnglish
Published St. Louis Federal Reserve Bank of St. Louis 01.01.2018
Subjects
Securities trading
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Summary:Despite a regulatory effort to promote all-to-all trading, the post-Dodd-Frank index-CDS market remains two-tiered. Dealer-to-client trades have higher transaction costs than interdealer trades. The difference is entirely explained by the higher, largely permanent, price impact of client trades. However, transaction costs of interdealer trades vary significantly across trading protocols. Mid-market matching and workup -- both characterized by execution risk -- incur the smallest costs. Dealer-to-client trades typically execute well inside the spread quoted on the interdealer limit order book. Thus, clients who value immediacy could not improve execution with marketable interdealer orders. This may explain the endurance of the two-tiered market structure.