Skip to main content
SpringerLink
Log in

Retail Investors and the Trading of Treasury Securities

  • Published:
Journal of Financial Services Research Aims and scope Submit manuscript

Abstract

I analyze implicit transaction costs of trading government debt securities on the Spanish stock exchanges (SE) electronic trading system. The SE’s multilateral system is used mainly as an outlet for retail investors to liquidate Treasury accounts positions before maturity. I compare identical Treasury security trades on the same day in two different markets: the SE and the interdealer market. By analyzing these yield spreads I learn more about the behavior of the markdowns included in the retail prices from the institutional prices. I find evidence that these yield premia depend on traditional features to explain wholesale market liquidity premia.

This is a preview of subscription content, log in via an institution to check access.

Access this article

Log in via an institution

Price excludes VAT (USA)
Tax calculation will be finalised during checkout.

Instant access to the full article PDF.

Institutional subscriptions

Fig. 1

Similar content being viewed by others

Notes

  1. Both the opening and the maintenance of a direct account at the Bank of Spain are free of charge. Only if there is a payment of either interests or principal, the Bank of Spain applies a commission of 0.15% of the transferred amount with a minimum of €0.90. Fernández et al. (2007) analyze the investment in Spanish mutual funds for the period 1997–2006. They observe that the Total Expense Ratio (i.e., explicit fees and commissions divided by the fund’s total assets) is 0.74% for short-term fixed-income mutual funds, and 1.20% for long-term fixed-income mutual funds. This ratio does not include fees that managers pay for trading assets.

  2. However, if a stock broker receives a limit order, i.e. an order with price, he does not have any duty to buy the assets. If the order has not been executed by the end of the month in which he is responsible to place the order, he transfers the order back to the Bank of Spain.

  3. Also, BIS (2001) analyzes the advantages of electronic trading platforms for reducing liquidity risk premia. However, most or even all of these advantages are unsuitable in a market as illiquid as the electronic trading system of the SE.

  4. See, e.g., Bessembinder et al. (2006), Edwards et al. (2007), and Goldstein et al. (2007). In the same spirit, Biais and Declerck (2007) analyze the European corporate market and Khan (2007) studies the Canadian government bond market.

  5. Additionally, a summary of transaction prices, yields, and volumes per traded government security is published daily in the bulletin of both the MDPA and the SE market. There is an electronic version of each bulletin available for free on the Internet.

  6. A component of the yield spreads can result from the different timing of the transaction during the day.

  7. I exclude extreme observations (approximately 2% of matched pairs). These figures are similar for bills. They are not reported to conserve space and are available on request.

References

  • Bank for International Settlements (2001) The implications of electronic trading in financial markets. Committee on the Global Financial System, January

    Google Scholar 

  • Bessembinder H, Maxwell W, Venkataraman K (2006) Optimal market transparency: Evidence from the initiation of trade reporting in corporate bonds. J Financ Econ 82:251–288. doi:10.1016/j.jfineco.2005.10.002

    Article  Google Scholar 

  • Biais B, Declerck F (2007) Liquidity, competition & price discovery in the European corporate bond market. IDEI Working Papers, no. 475

  • Díaz A, Merrick J, Navarro E (2006) Spanish Treasury Bond Market Liquidity and Volatility Pre- and Post-European Monetary Union. J Bank Finance 30(4):1309–1332. doi:10.1016/j.jbankfin.2005.05.009

    Article  Google Scholar 

  • Edwards AK, Harris LE, Piwowar MS (2007) Corporate Bond Market Transaction Costs and Transparency. J Finance 62(3):1421–1451. doi:10.1111/j.1540-6261.2007.01240.x

    Article  Google Scholar 

  • Fernández P, Carabias JM, De Miguel L (2007) Mutual funds in Spain (Rentabilidad de los Fondos de Inversion en 1991–2006), SSRN Working Paper

  • Fisher L (1959) Determinants of risk premiums of corporate bonds. J Polit Econ 67(3):217–237. doi:10.1086/258172

    Article  Google Scholar 

  • Fleming MJ (2002) Are larger Treasury issues more liquid? Evidence from bill reopenings. J Money, Credit Bank 3(2):707–735. doi:10.1353/mcb.2002.0013

    Article  Google Scholar 

  • Glaessner TG, Kantur Z (2004) Two case studies on electronic distribution of Government securities: The U.S. treasurydirect system and the Philippine expanded small investors program. World Bank Policy Research Working Paper no. 3372

  • Goldstein M, Hotchkiss E, Sirri E (2007) Transparency and Liquidity: A Controlled Experiment on Corporate Bonds. Rev Financ Stud 20:235–273. doi:10.1093/rfs/hhl020

    Article  Google Scholar 

  • Gravelle T (1999) Liquidity of the Government of Canada securities market: Stylized facts and some market microstructure comparisons to the United States treasury market. Bank of Canada Working Paper no. 99–11

  • Green RC, Hollifield B, Schürhoff N (2007) Financial Intermediation and the Costs of Trading in an Opaque Market. Rev Financ Stud 20:275–314. doi:10.1093/rfs/hhl012

    Article  Google Scholar 

  • Harris L, Piwowar M (2006) Secondary trading costs in the municipal bond market. J Finance 61:1361–1397. doi:10.1111/j.1540-6261.2006.00875.x

    Article  Google Scholar 

  • Hong G, Warga A (2000) An empirical study of bond market transactions. Financ Anal J 56(2):32–46. doi:10.2469/faj.v56.n2.2342

    Article  Google Scholar 

  • Jordan SD, Kuipers DR (2005) End-of-day pricing in the U.S. Treasury market: a comparison of GovPX and the Federal Reserve Bank of New York. J Financ Res 28(1):97–113. doi:10.1111/j.1475-6803.2005.00116.x

    Article  Google Scholar 

  • Kahn N (2007) Impact of electronic trading platforms on the brokered interdealer market for Government of Canada benchmark bonds. Bank of Canada working paper 2007-5

  • O’Hara M (1995) Market Microstructure Theory. Blackwell Publishers Inc., Cambridge, MA

    Google Scholar 

  • Sarig O, Warga A (1989) Bond price data and bond market liquidity. J Financ Quant Anal 24(3):367–378. doi:10.2307/2330817

    Article  Google Scholar 

  • Schultz P (2001) Corporate bond trading costs: a peek behind the curtain. J Finance 56(2):677–698. doi:10.1111/0022-1082.00341

    Article  Google Scholar 

  • Warga A (1991) Corporate bond price discrepancies in the dealer and exchange markets. J Fixed Income 1:7–16

    Article  Google Scholar 

  • Warga A (1992) Bond returns, liquidity, and missing data. J Financ Quant Anal 27(4):605–617. doi:10.2307/2331143

    Article  Google Scholar 

Download references

Acknowledgements

I would like to express my gratitude to Paul Kupiec (the editor), an anonymous referee, and Eliseo Navarro, Alberto Cillán, Fermín Ederra, John Merrick, Manuel Montes, Gregorio Oyaga, and Frank Skinner for their helpful comments and suggestions, and to Bolsa de Madrid for providing part of the information used in this research. I also acknowledge the financial support provided by Junta de Comunidades de Castilla-La Mancha grant PCI08-0089 and Ministerio de Educación y Ciencia grant SEJ2005-08931-C02-01, which are partially supported by FEDER funds. Any error is entirely my own.

Author information

Authors and Affiliations

  1. Departamento de Análisis Económico y Finanzas, Facultad de C. Económicas y Empresariales de Albacete, Universidad de Castilla-La Mancha, Plaza Universidad, 1, 02071, Albacete, Spain

    Antonio Díaz

Authors
  1. Antonio Díaz
    View author publications

    You can also search for this author in PubMed Google Scholar

Corresponding author

Correspondence to Antonio Díaz.

Rights and permissions

Reprints and permissions

About this article

Cite this article

Díaz, A. Retail Investors and the Trading of Treasury Securities. J Financ Serv Res 36, 45–63 (2009). https://doi.org/10.1007/s10693-009-0062-y

Download citation

  • Received:

  • Revised:

  • Accepted:

  • Published:

  • Issue Date:

  • DOI: https://doi.org/10.1007/s10693-009-0062-y

Keywords

JEL Classification

Search

Navigation