Over-the-Counter Intermediation, Customers’ Choice and Liquidity Measurement (JMP) [pdf][slides] Stringent financial regulations and advancing trading technologies have reshaped over-the-counter intermediation, discouraging dealers from providing immediacy to customers using their own inventories (principal trading) in favor of a larger matchmaking activity (agency trades). This paper studies how customers optimally choose between these two trading mechanisms and the implications of this choice for market liquidity. I develop a quantitative search model where heterogeneous customers choose between immediate but expensive and delayed but less costly trades, i.e., principal and agency trades, respectively. Each customer solves this speed-cost trade-off, jointly determining her optimal mechanism, transaction costs, and trading volume. When market conditions change, customers migrate across mechanisms in pursuit of higher trading surpluses. I show that this migration is not random, thus liquidity measures change not only because of changes in market conditions but also because of a composition effect. To quantify such an effect, I structurally estimate my model and build counterfactual measures that control for migration. I replicate the major innovations seen in these markets and find that composition effects explain more than a third of the increase in principal transaction costs. Awards: Best Proseminar Paper in Monetary Economics and Macroeconomics, Department of Economics, UCLA, 2022-2023. Presented at: Federal Reserve Board Research and Statistics Workshop, EEA-ESEM 2023, Northern Finance Association 2023, and West Coast Search and Matching Workshop 2023.
Portfolio Trading in the Corporate Bond Market This paper studies a recent innovation in the corporate bond market: portfolio trading. In contrast to sequential trading, this new protocol allows customers to trade a bundle of bonds as a single security, preventing dealers from splitting the order. I show that such restriction has significant consequences over the market liquidity. Particularly, I present novel evidence of asymmetrical transaction costs: compared to sequential trading, portfolio trading is less expensive when customers buy and more expensive when they sell. I find that dealers’ balance sheet costs and portfolios’ diversification explain such differences. To rationalize these empirical results, I develop a search model in which customers trade bundles through whether portfolio or sequential trading. Dealers intermediate all trades, incurring costs that are inversely related to their time-varying risk-bearing capacity. I show that customers sort across trading protocols according to dealers’ risk-bearing capacities and provide solutions for the corresponding thresholds. Finally, I develop analytical expressions for transaction costs differentials, which are able to resemble the patterns observed empirically.