Do Canadian Broker-Dealers Act as Agents or Principals in Bond Trading?

Technology, risk tolerance and regulation may influence dealers to reduce their trading as principals (using their own balance sheets for sales and purchases of securities) in favour of agency trading (matching client trades). A move toward agency trading would represent a change in the structure of Canadian bond markets and, in theory, could worsen some aspects of market liquidity. To assess the prevalence of agency trading in Canada, we use data from the Market Trade Reporting System to construct the first estimate of agency-based trading in Canadian bond markets. We find that agency trading is relatively uncommon across major segments of Canadian fixed-income market and that large bank broker-dealers are less likely than their smaller counterparts to trade as an agent.