The behavior of dealers and clients on the European corporate bond market: the case of Multi-Dealer-to-Client platforms

TL;DR

This paper analyzes the transition of the European corporate bond market towards electronic trading platforms, modeling RFQ processes and revealing behaviors of dealers and clients on MD2C platforms using proprietary data.

Contribution

It introduces a model of RFQ processes on MD2C platforms and infers dealer and client behaviors from proprietary trading data.

Findings

Model of RFQ process and dealer competition

Insights into dealer and client behavior patterns

Implications for market liquidity and efficiency

Abstract

For the last two decades, most financial markets have undergone an evolution toward electronification. The market for corporate bonds is one of the last major financial markets to follow this unavoidable path. Traditionally quote-driven i.e., dealer-driven) rather than order-driven, the market for corporate bonds is still mainly dominated by voice trading, but a lot of electronic platforms have emerged. These electronic platforms make it possible for buy-side agents to simultaneously request several dealers for quotes, or even directly trade with other buy-siders. The research presented in this article is based on a large proprietary database of requests for quotes (RFQ) sent, through the multi-dealer-to-client (MD2C) platform operated by Bloomberg Fixed Income Trading, to one of the major liquidity providers in European corporate bonds. Our goal is (i) to model the RFQ process on these platforms and the resulting competition between dealers, and (ii) to use our model in order to implicit from the RFQ database the behavior of both dealers and clients on MD2C platforms.