DP4285 Trading European Sovereign Bonds: The Microstructure of the MTS Trading Platforms
Authors: Yiu Chung Cheung (University of Amsterdam), Frank de Jong (University of Amsterdam and CEPR) and Barbara Rindi (University of Amsterdam)
March 2004
The MTS Global Market bond trading system is the largest pan-European interdealer trading system for Eurozone government bonds. It is an interdealer system, and a market maker can pass on any security to another market maker - this is called 'hot potato' trading. Previous research has shown that the passing of inventory is harmful as it creates additional noise in the order flow. In order to avoid any sequence of hot potato trading, the impact of an unexpected trade in a low trading environment should have a larger impact on the price than under a low interdealer-trading environment. The MTS dataset used in this study gives the opportunity to test this.
The authors find that quoted and effective spreads are small: between 1 and 3 basis points for issues up to 10-year maturity. Spreads vary positively with maturity and trading intensity. Estimated spreads on EuroMTS are typically slightly higher than on the domestic markets, but the difference is small in economic terms. The regression results show that order flow plays a key role in price discovery in the bond market. Transitory costs are more important in domestic markets like Italy and Belgium, which are dominated by local traders. In addition, this study finds a positive relationship between trading intensity and price returns.
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