June 2024

Information Friction in OTC Interdealer Markets

Benjamin Gardner and Yesol Huh


In over-the-counter (OTC) securities markets, interdealer markets are an important venue through which dealers can offload positions and share risk amongst themselves. Contrary to the popular conception that search frictions matter the most in OTC markets, we find that in the interdealer market for U.S. corporate bonds, information frictions are most relevant. Large dealers face large and informed customers and pay more than small dealers to transact in the interdealer market, despite on average providing liquidity to other dealers. Large dealers tend to trade through interdealer brokers (IDBs) to mitigate information leakage, but interdealer markets are still far from efficient.

Keywords: OTC markets, Information asymmetry, Interdealer markets

DOI: https://doi.org/10.17016/FEDS.2024.040

PDF: Full Paper

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Last Update: June 14, 2024