SSRN-Optimal Market Transparency: Evidence from the Initiation of Trade Reporting in Corporate Bonds by Hendrik Bessembinder, William Maxwell, Kumar Venkataraman

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Optimal Market Transparency: Evidence from the Initiation of Trade Reporting in Corporate Bonds

HENDRIK BESSEMBINDER
University of Utah - Department of Finance
WILLIAM F. MAXWELL
University of Arizona - Department of Finance
KUMAR VENKATARAMAN
Southern Methodist University - Edwin L. Cox School of Business

Abstract:
We estimate trade execution costs for a sample of institutional (insurance company) trades in corporate bonds before and after the initiation of public transaction reporting for some bonds through the TRACE system in July 2002. The results indicate a remarkable 50% reduction in trade execution costs for bonds eligible for TRACE transaction reporting, and a 20% reduction for bonds not eligible for TRACE reporting. The latter result likely reflects that better pricing information regarding some bonds also improves valuation and execution cost monitoring for related bonds. Larger trading cost reductions are estimated for less liquid and lower-rated bonds, and for larger trades. The key results are robust to allowances for changes in variables, such as interest rate volatility and trading activity, which might also affect execution costs. We find no evidence that market quality deteriorated in other dimensions. The point estimates equate to annual trading cost reductions of roughly $370 million per year for the entire corporate bond market, reinforcing that market design can have first-order effects, even for relatively sophisticated institutional customers.

Keywords: transparency, corporate bonds, trace

JEL Classifications: G14, G18, G28

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Abstract has been viewed 185 times

Contact Information for HENDRIK BESSEMBINDER (Contact Author)

Email address for HENDRIK BESSEMBINDER
University of Utah - Department of Finance
David Eccles School of Business
Salt Lake City , UT 84112
United States

Contact Information for WILLIAM F. MAXWELL

Email address for WILLIAM F. MAXWELL
University of Arizona - Department of Finance
McClelland Hall
P.O. Box 210108
Tucson , AZ 85721-0108
United States

Contact Information for KUMAR VENKATARAMAN

Email address for KUMAR VENKATARAMAN
Southern Methodist University - Edwin L. Cox School of Business
P.O. Box 750333
Dallas , TX 75275-0333
United States
(214) 768 7005 (Phone)
(214) 768 4099 (Fax)

Suggested Citation

Bessembinder, Hendrik (Hank), Maxwell, William and Venkataraman, Kumar, "Optimal Market Transparency: Evidence from the Initiation of Trade Reporting in Corporate Bonds" (January 6, 2005). http://ssrn.com/abstract=644624

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