The Microstructure of the Bond Market in the 20th Century

Résumé

Bonds are traded in opaque and fragmented over-the-counter markets. Is there some- thing special about bonds precluding transparent limit-order markets? Historical experience suggests this is not the case. Before WWII, there was an active market in corporate and municipal bonds on the NYSE. Activity dropped dramatically, in the late 1920s for munici- pals and in the mid 1940s for corporate, as trading migrated to the over-the-counter market. Average trading costs in municipal bonds on the NYSE were half as large in 1926-1927 as they are today over the counter. Trading costs in corporate bonds for small investors in the 1940s were as low or lower than they are now. The di¤erence in transactions costs likely re- ?ects the di¤erences in market structures, since underlying technological changes have likely reduced costs of matching buyers and sellers