All-to-All Liquidity in Corporate Bonds

Abstract
We examine technology enabling dispersed investors to directly trade with each other in over-the-counter markets. The largest electronic trading platform in corporate bonds started Open Trading (OT) to allow investor-to-investor trading. Over our 2014-2018 sample OT grew to win 12% of trades on the platform. However, just 2% are investor-to-investor trading, 3% are dealers trading with new clients, and 7% are new liquidity providers acting like dealers. This suggests that investors in corporate bonds prefer intermediation to direct trade. However, OT can enable new dealers to compete in liquidity provision, improving prices by 6bps by the end of 2018 with 2bps in direct improvement from OT winning and 4bps in indirect improvement from increased competition. We find evidence of a significant winner’s curse in corporate bond trading that can explain the lack of investor-to-investor trading and the slow and specialized entry by new dealers.