OTC Discount

This paper studies venue choice and price discrimination in the market for German Bunds, the world's second most liquid treasury market. Dealers trade Bunds in a hybrid market with electronic centralized limit order books (on the interdealer exchange MTS) and a dominant over-the-counter (OTC) segment. Using a unique regulatory dataset of OTC Bund transactions matched with the full limit order book of MTS, we show that the exchange provides an outside option to the OTC search process and, crucially, immediacy. OTC trades carry an average discount of 1.3 - 3.7 basis points relative to trading on exchange, and OTC round-trip costs are on average up to 50% lower than on the MTS market. OTC trades by dealers with access to the exchange are on average 0.6 basis points cheaper than those by non-MTS dealers. Our findings highlight the complementary roles played by centralized limit order book and OTC markets