Click or Call? Auction versus Search in the Over-the-Counter Market




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    • Haas School of Business, University of California, Berkeley and BlackRock, Inc. We thank the Editor, Cam Harvey, an anonymous Associate Editor, an anonymous referee, participants at the 2012 Western Finance Association, NYU Stern Market Microstructure conference, and BlackRock's Research Workshop, Hank Bessimbinder, Mark Coppejans, Chris Downing, Larry Harris, Burton Hollifield, Francis Longstaff, Farshad Mashayekhi, Alex Sedgwick, and Kumar Venkataraman for helpful suggestions and MarketAxess® for some of the data used herein. Of course, any errors are entirely our own. The views expressed here are those of the authors alone and not necessarily those of BlackRock, its officers, or directors. This note is intended to stimulate further research and is not a recommendation to trade particular securities or of any investment strategy.


Over-the-counter (OTC) markets dominate trading in many asset classes. Will electronic trading displace traditional OTC “voice” trading? Can electronic and voice systems coexist? What types of securities and trades are best suited for electronic trading? We study these questions by focusing on an innovation in electronic trading technology that enables investors to simultaneously search many bond dealers. We show that periodic one-sided electronic auctions are a viable and important source of liquidity even in inactively traded instruments. These mechanisms are a natural compromise between bilateral search in OTC markets and continuous double auctions in electronic limit order books.