Trading Credit Default Swaps Via Interdealer Brokers

Credit default swaps (CDSs) are among the most successful financial innovations of recent years, which is reflected in the rapidly expanding market. CDS trading occurs in the over-the-counter market, which relies heavily on broker intermediation to arrange trades. We provide empirical evidence that liquidity in the voice brokered market varies with the particulars of the CDS contracts and that the differences in market structure is reflected in the costs of liquidity. Moreover, the brokered and direct interdealer trading markets seem to be well integrated; thus the higher liquidity costs in the brokered market may reflect the value of intermediation. Hybrid market structures, which combine voice brokerage with an electronic platform, are discussed as a viable alternative to fully automated trading systems