XXVI Edition

14-15-16 December 2017"

Informed trading in a two-tier market structure under financial distress

Paiardini Paola, Department of Economics, University of Birmingham

The sovereign bond market has traditionally been the dominant segment of the euro area bond market and it is one of the largest in the world. The secondary market of the European sovereign bonds is organised as a two-tier electronic market, with an inter-dealer and a dealer-to-customer segment. The two segments differ in terms of trading rules and transparency requirements. The previous literature uses a sequential trade model, to investigate the probability of informed trading (PIN) in the parallel trading of the same bond on these two venues, finding that PIN is significantly lower in the dealer-to-customer segment than in the inter-dealer one. We compute the PIN between January 2007 and December 2014 at a quarterly frequency. This period is characterised by financial distress in the Eurozone and by various ECB interventions to try to contain the crisis. We show that the crisis deeply affected the two segments of the market and that, for some periods, the conclusion about the presence of informed traders in the two platforms is reversed.

Area: Financial Stability

Keywords: Market microstructure; Informed trading; Government bonds

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