Dealer Networks and the Cost of Immediacy

We show that uninformed corporate bond index trackers pay lower transaction costs when they request immediacy from more central dealers in the network. This centrality discount supports recent network models in which core dealers have a comparative advantage in carrying inventory. Core dealers provide more immediacy and revert deviations from their desired inventory faster. When dealers trade with other dealers, we find a centrality premium consistent with core dealers exploiting their comparative advantage to extract more surplus when bargaining with peripheral dealers. Using trades around index exclusions
rule out alternative explanations based on adverse selection, customer bargaining power, and customer clienteles.