Hendrik Bessembinder, Stacey Jacobsen, William F. Maxwell, and Kumar Venkataraman
Journal of Finance, Forthcoming.
Publication year: 2017

We study trading costs and dealer behavior in U.S. corporate bond markets from 2006 to 2016. Despite a temporary spike during the financial crisis, trade execution costs have not increased notably over time. However, alternative measures, including dealer capital commitment over various time horizons, turnover, block trade frequency, and average trade size not only decreased during the financial crisis, but continued to decline afterward. These declines are attributable to bank-affiliated dealers, as non-bank dealers have increased their market commitment. The evidence supports that liquidity provision in the corporate bond markets is evolving away from the traditional commitment of dealer capital to absorb customer imbalances and toward dealers playing more of a matching role, and that post-crisis regulations focused on banking contributed.