This grant produced a paper, "Corporate Bond Trade Costs and Practices: A Peek Behind the Curtain," which was published in the April 2001 issue of the Journal of Finance.
The paper analyzes a large sample of institutional bond trades over 1995-1997 to describe institutional trading practices and provide estimates of trading costs in the over-the-counter fixed income market. The data include information on trades totaling over $600 billion by over 600 institutions. The size of the median trade is approximately $1,500,000. Buy orders are almost twice as common as sell orders. This reflects the fact that many institutions buy bonds and hold them until maturity.
Professor Schultz also finds that trading tends to be concentrated in the period immediately after issuance. He reports that the median percentage of the bond's life remaining at the time of the trade is 85 percent. Moreover, 25 percent of the trades take place with at least 97 percent of the total time to maturity remaining.
The paper reports an estimate of round-trip institutional trading costs for investment grade bonds of 27 basis points. The author finds that trading costs decline with order size and with the size of the institutional investor. Professor Schultz found no evidence that trading costs increase for lower-rated bonds.
