Corporate bond trading on a limit order book exchange

Menachem Abudy*, Avi Wohl

*Corresponding author for this work

Research output: Contribution to journalArticlepeer-review

23 Scopus citations

Abstract

We investigate the trading of corporate bonds (c-bonds) by an open limit order book (LOB) mechanism. To do so, we use the case of the Tel Aviv Stock Exchange (TASE) as a laboratory, in which both stocks and c-bonds are traded by an LOB mechanism. Contrary to the OTC market in the USA, the TASE c-bond market is liquid with narrow spreads and low price dispersion. The short-term traders (STT), who are the analog of the market makers in the LOB, have small trading rents and unconcentrated activity (a low Herfindahl index). In the cross-section of bonds, the low concentration is related to low spreads, low price dispersion, and small STT rents. The non-STT [including retail investors (RIs), whose participation is significant] competes with the STT on quotation and tends to tighter quotes. RIs' activity contributes to narrower spreads.

Original languageEnglish
Pages (from-to)1413-1440
Number of pages28
JournalReview of Finance
Volume22
Issue number4
DOIs
StatePublished - 1 Jul 2018

Funding

FundersFunder number
Jeremy Coller Foundation
Maurice Falk Institute for Economic Research in Israel

    Keywords

    • Bid-ask spreads
    • Corporate bonds
    • Liquidity
    • Retail investors
    • Short-term investors
    • Trading costs

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