Corporate Bond Trading on a Limit Order Book Exchange

Is corporate bond (c-bond) trading fundamentally different from stock trading when both these security types are traded on an exchange? We investigate a sample of firms with c-bonds and stocks on the Tel Aviv Stock Exchange (TASE), where c-bonds are traded like stocks in a limit order book, and find no fundamental difference between the two types. Compared with stocks, c-bonds have lower average bid-ask spreads (0.077% vs. 0.087%) and lower off-exchange trading (9.47% vs. 25.45%), higher retail participation (7.28% vs. 6.38%), lower short-term trader participation (34.18% vs. 43.70%) with higher market concentration, lower trading costs of retail investors (0.068% vs. 0.087%) and higher trading profits of short-term traders (0.014% vs. 0.002%). However, these small differences arise mainly from the security's characteristics (STD and SIZE) and not from the security type (c-bond vs. stock). The characteristics of the TASE c-bond market are in contrast to findings from the US c-bond OTC markets where c-bond spreads are higher, retail participation is very low and retail trading costs are very high. These findings provide evidence confirming the feasibility of successful c-bond trading on a limit order book exchange.