Transparency and Liquidity in the Structured Product Market

We use a unique data set from the Trade Reporting and Compliance Engine (TRACE) to study liquidity effects in the U.S. structured product market. Our main contribution is the analysis of the relation between accuracy in measuring liquidity and the level of detail of the trading data employed. We find evidence that, in general, liquidity measures that use dealer-specific information can be efficiently proxied by means of measures that use less detailed information. However, when the level of trading activity in individual securities or overall market activity is low, measures based on more detailed trading data permit a more precise assessment of liquidity. These results provide us with a better understanding of the information contained in disseminated OTC trading data, in general.