The authors of a Swiss Institute Research paper found that trading volumes are larger and transaction costs are higher in the "dealer-to-client" trades than "interdealer trades" of the credit default swaps ("CDS") market.
According to the finance professors Pierre Collin-Dufresne and Anders B. Trolle, et al., the CDS market has been functioning as a "two-tiered market" since the implementation of Dodd-Frank, consisting of client trades and interdealer trades. The difference in transaction costs, the authors determined, is due to (i) a "higher price impact of [client] trades" and (ii) the characteristics of client trades, which are "relatively infrequent, large in size, and differentially informed." The authors conclude that "market quality is high in the index CDS market," but question (without answering) whether market fragmentation is "welfare improving."
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