Centralizing Over-the-Counter Markets?

Would a shift in trading in fixed-income markets from over the counter (bilateral trading) to a centralized electronic platform improve welfare? We use trade-level data on the secondary market for Government of Canada debt to answer this question.

We document that in the market for Government of Canada bonds, large (institutional) investors pay consistently lower prices than small (retail) investors. We show that this is partly because institutional investors have access to the electronic platform CanDeal, while retail investors do not.

Our main analysis quantifies:

• the role of platform access in driving the differences in prices
• how changes to platform access could improve welfare

We introduce and estimate a model in which dealers and investors trade. Institutional investors can choose to trade either bilaterally or on the platform; retail investors can trade only bilaterally. Dealers set prices in both markets to maximize profits. When we allow retail investors to trade on the platform, most do—and prices fall. The platform is not perfect, however, so not everyone trades there. Nevertheless, welfare improves. This suggests that policies aimed at promoting platform access can lead to better prices for Canadian investors.