Pre-trade transparency and market quality in corporate bond markets

Abstract This paper studies how pre-trade transparency is associated with market quality in corporate bond markets. We examine the Swiss corporate bond market, which features a central limit order book (CLOB) with publicly visible quotes alongside a coexisting over-the-counter (OTC) market, and compare it to the predominantly OTC-driven U.S. market. Using a comprehensive transaction-level dataset, we document that while the Swiss market is substantially smaller and exhibits lower trading activity, it displays significantly more favorable price-based liquidity measures, with lower transaction costs, price dispersion, and price impact. Importantly, these differences extend beyond CLOB-trading: even OTC transactions are executed at more competitive prices relative to the U.S. market. Moreover, OTC transaction prices closely align with publicly observable CLOB quotes: 95% occur within quoted bid-ask boundaries, most execute near the quoted midpoint. Furthermore, narrower quoted bid-ask spreads and greater quoted depth in the CLOB are associated with lower OTC transaction costs. We provide evidence consistent with the view that pre-trade transparency is associated with improved pricing by providing all market participants with a common reference point that may strengthen investors’ bargaining position and encourage dealers to offer more competitive OTC prices. These findings highlight the potential role of pre-trade transparency in improving market quality in decentralized trading environments.