Swap Trading after Dodd-Frank : Evidence from Index CDS

The Dodd-Frank Act mandates that certain standard OTC derivatives, also known as swaps, must be traded on swap execution facilities (SEFs). Using message-level data, we provide a granular analysis of dealers' and customers' trading behavior on the two largest dealer-to-customer SEFs for index CDS. On average, a typical customer contacts few dealers when seeking liquidity. A theoretical model shows that the benefit of competition through wider order exposure is mitigated by a winner's curse problem and dealer-customer relationships. Consistent with the model, we find that order size, market conditions, and customer-dealer relationships are important empirical determinants of customers' choice of trading mechanism and dealers' liquidity provision