The liquidity of credit default index swap networks

Richard Haynes and Lihong McPhail

Abstract

Recent regulatory reforms such as the mandatory clearing of standardized swap con- tracts and mandatory trading on centralized execution platforms have significantly changed the derivatives landscape. These reforms have, in certain cases, led the mar- ket to increasingly trade on multilateral platforms, potentially affecting the average cost of execution. Prior research has examined the effects of centralized trading on execution costs and has generally found that it reduces costs, especially for entities with higher transaction volumes or greater execution flexibility. We use detailed information on the trading of credit index swaps, the most actively traded credit derivatives instrument, between May 2014 and September 2016. We find that the customers who trade with a higher number of dealers (high network degree) and those who trade with the most active dealers (high network centrality) incur lower trading costs. For the less liquid indexes, at least, this cost improvement increases as trade size increases. We also identify a few liquidity trends: measures such as average daily volume, average price impact and price dispersion remain steady or improve. However, during the same period, trade sizes for certain indexes may decline slightly.