Pricing of Interdealer OTC Derivatives in a Limit Order Market: Evidence From Indian OIS Trade‐Level Data

Abstract

Using regulatory interdealer trade‐level data on overnight indexed swaps (OIS) in India, the paper examines the trading behavior and prices in an interdealer market populated by traders of varying liquidity needs. Inactive investors receive a lower return relative to active investors when trading outside a central limit order book (CLOB) venue but receive relatively better returns on it. This differential return could be attributed to the differing levels of speed preference across investors with active investors being the most impatient or needing the quickest execution. Consistent with extant theoretical literature on speed frictions, inactive traders submit limit orders and face slower execution whereas active traders submit market orders and receive quicker execution on CLOB. The findings allude to the greater role liquidity requirements play in a CLOB as opposed to other non CLOB OTC markets where search and bargaining frictions dominate.