Riskless Principal Trades in Corporate Bond Markets

We identify growth in riskless principal trades using corporate bond market trade data. These trades are arranged by a dealer that obtains compensation by marking up the price instead of charging a commission. In the U.S. markets, over the last 18 years, riskless principal trades increased from 16% to 42% of all customer trades, while the size of non-zero markups declined 48% on average, with most changes occurring recently. The growth in electronic trading systems undoubtedly explains these trends, but most traders cannot directly access these systems. Some changes to bond market structure could further decrease investor transaction costs.