Market Structure and Transaction Costs of Index CDSs

Pierre Collin-Dufresne, Benjamin Junge, Anders B. Trolle*

*Corresponding author for this work

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Despite regulatory efforts to promote all-to-all trading, the post–Dodd-Frank index credit default swap market remains two-tiered. Transaction costs are higher for dealer-to-client than interdealer trades, but the difference is explained by the higher, largely permanent, price impact of client trades. Most interdealer trades are liquidity motivated and executed via low-cost, low-immediacy trading protocols. Dealer-to-client trades are nonanonymous; they almost always improve upon contemporaneous executable interdealer quotes, and dealers appear to price discriminate based on the perceived price impact of trades. Our results suggest that the market structure is a consequence of the characteristics of client trades: relatively infrequent, large, and differentially informed.
Original languageEnglish
JournalJournal of Finance
Issue number5
Pages (from-to)2719-2763
Number of pages45
Publication statusPublished - Oct 2020

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