OTC discount

We document a sizable OTC discount in the interdealer market for German sovereign bonds where exchange and over-the-counter trading coexist: the vast majority of OTC prices are favorable compared to exchange quotes. This is a challenge for theories of OTC markets centered around search-and-bargaining frictions but consistent with models of hybrid markets based on information frictions. We find support for this explanation. Distinguishing between bilateral and broker-intermediated OTC trades, di↵erences in OTC discount across protocols are consistent with their relative informedness. Within each protocol, the di↵erence in OTC discount is explained not only by information but also by search-and-bargaining frictions.