UiS Working Papers in Economics and Finance,
University of Stavanger

Abstract: This paper investigates whether establishing an electronic limit order book (LOB) in a current over-the-counter (OTC) bond market will move the price discovery process onto the new venue and if so, whether informed traders supply or demand liquidity. A detailed data set from the hybrid Norwegian government bond market shows that informed dealers prefer market orders in the LOB. The results further show that uninformed dealers tend to provide liquidity to informed dealers. Informed dealers’ preference for speed can reflect that limit orders and OTC trading are exposed to waiting costs which can be substantial in many bond markets. These findings suggest that recently proposed pre-trade transparency requirements will contribute to a more effcient price discovery process in current OTC bond markets and that an incentive scheme for liquidity suppliers could enhance it further.

Keywords: Bonds; informed dealers; order flow

JEL-codes: G12; G14; G17

55 pages, November 9, 2016

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uis_wps_2016_13_valseth.pdf  

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