Customer Liquidity Provision: Implications for Corporate Bond Transaction Costs

Jaewon Choi, Yesol Huh, Sean Seunghun Shin

Research output: Contribution to journalArticlepeer-review


The convention when calculating corporate bond trading costs is to estimate bid–ask spreads that customers pay, implicitly assuming that dealers always provide liquidity to customers. We show that, contrary to this assumption, customers increasingly provide liquidity following the adoption of post-2008 banking regulations, and thus, conventional bid–ask spread measures underestimate the cost of dealers’ liquidity provision. Among large trades wherein dealers use inventory capacity, customers pay 40%–60% wider spreads than before the crisis. Customers’ balance-sheet capacity and their trading relationships with dealers are important determinants of customer liquidity provision.

Original languageEnglish (US)
Pages (from-to)187-206
Number of pages20
JournalManagement Science
Issue number1
StatePublished - Jan 2024


  • bank regulations and OTC liquidity
  • corporate bond liquidity
  • customer liquidity provision
  • insurer liquidity provision

ASJC Scopus subject areas

  • Strategy and Management
  • Management Science and Operations Research


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