Trading Credit Default Swaps via Interdealer Brokers

Credit default swaps (CDSs) are among the most successful financial innovationsof recent years, which is reflected in the rapidly expanding market. CDS trading occurs inthe over-the-counter market, which relies heavily on broker intermediation to arrangetrades. We provide empirical evidence that liquidity in the voice brokered market varieswith the particulars of the CDS contracts and that the differences in market structure isreflected in the costs of liquidity. Moreover, the brokered and direct interdealer tradingmarkets seem to be well integrated; thus the higher liquidity costs in the brokered marketmay reflect the value of intermediation. Hybrid market structures, which combine voicebrokerage with an electronic platform, are discussed as a viable alternative to fullyautomated trading systems.[...]