Competition-Enhancing Changes in Secondary Corporate Bonds

We plan to study the liquidity and price efficiency of an important but relatively illiquid asset class, i.e. corporate bonds. Many companies have a large number of bond issues outstanding and market participants suggest that this fragmentation of issues is one important source of illiquidity. We will test this as yet empirically unexplored conjecture. Furthermore, the market structure of the corporate bond market has been dominated by large dealer banks for a long time, who have been able to exploit the relative opacity of this market. New competing trading venues have recently emerged, creating increased pre-trade transparency and the possibility of direct trades between customers without layers of intermediation. We will investigate liquidity in these new markets, as compared to the incumbent dealers. For prices to be informationally efficient and thus useful for corporate investment decision makers, liquidity is a necessary condition as investors otherwise, in the face of high trading costs, refrain from trying to acquire information. We will also thus test effects on price efficiency.