Market-making v.s. matchmarking: an empirical analysis using TRACE data

Abstract

This study investigates the impact of Basel III Leverage Ratio and MiFID II on market-making and matchmaking dynamics in the U.S. corporate bond market. Utilizing transaction-level TRACE data, the analysis uncovers shifts in dealer strategies, liquidity provision and trade execution efficiency. Results reveal matchmaking’s unexpected yield advantages and superior profitability, while market-making retains its critical liquidity premium. Employing weighted Difference-in-Differences (DiD) regressions, the study highlights the nuanced effects of regulation across trade groups and counterparties. By addressing search frictions and regulatory pressures, the findings offer valuable insights for shaping balanced frameworks in decentralized financial markets.