The Benefits of Pre-Trade Transparency : A Cross-Market Comparison Between the U.S. and Swiss Corporate Bond Markets

In this essay, we investigate corporate bond trading in a fully pre-trade transparent market environment using a unique data sample from the Swiss corporate bond market. Contrary to the U.S. market, the Swiss market lists corporate bonds in a central limit order book (CLOB). While dealers place retail orders in the CLOB, larger orders are transacted OTC through dealer networks. A cross-market comparison reveals that the Swiss market is substantially smaller and its trading activities are lower. However, the cost dimension of liquidity is significantly more beneficial for investors with higher price competitiveness, a lower impact of trades on prices, lower transaction costs, and less price discrimination. These benefits do not only stem from the higher share of CLOB trades in Switzerland. We find that even in the OTC market, transaction costs and the level of discrimination against clients on price are significantly lower in Switzerland. The advantage of the Swiss OTC market over the large U.S. market in terms of market quality can be explained by market structure differences: In Switzerland, the CLOB provides a pre-trade transparent trading environment that levels the bargaining power in bilateral negotiations between investors and dealers. The U.S. Securities and Exchange Commission is currently evaluating how to increase the level of pre-trade transparency, which indicates the high relevance of this subject