Centralized trading of corporate bonds

In the post-crisis period, increased regulation of financial intermediaries led to a significant decline in corporate bond market liquidity. In order to stabilize these markets, policy makers recently proposed that the trading of corporate bonds should be more centralized. In this paper, we show that a centralization of corporate bond markets always leads to an inferior outcome when compared with the initial over-the-counter structure. The regulator may achieve a superior allocation only if it is feasible for him to also affect market liquidity, by either increasing or decreasing it.