Comparing Search and Intermediation Frictions Across Markets

In intermediated markets, trading takes time and intermediaries extract rents. We estimate

a structural search-and-bargaining model to quantify these trading delays, intermediaries’

ability to extract rents, and the resulting welfare losses in government and corporate bond

markets. Using transaction-level data from the UK, we identify a set of clients who are active

in both markets. We exploit the cross-market variation in the distributions of these clients’

trading frequency, prices, and trade sizes to estimate our structural model. We find that trading

delays and dealers’ market power both play a crucial role in explaining the differences in

liquidity across the two markets. Dealers’ market power is more severe in the government

bond market, while trading delays are more severe in the corporate bond market. We find

that the welfare loss from frictions in the government and corporate bond markets are 7.8%

and 12.2%, respectively, and our decomposition implies that this loss is almost exclusively

caused by trading delays in the corporate bond market, while trading delays and dealers’

market power split the welfare loss equally in the government bond market. Using data from

the COVID-19 crisis period, we also find that these welfare losses might more than triple

during turbulent times, revealing the fragility of the OTC market structure.