We develop a simple model of the effect of transaction reporting on trade execution costs and test it using a sample of institutional trades in corporate bonds, before and after the initiation of public transaction reporting through the TRACE system. The results indicate a reduction of approximately 50 % in trade execution costs for bonds eligible for TRACE transaction reporting, and consistent with the model’s implications, also indicate the presence of a “liquidity externality ” that results in a 20 % reduction in execution costs for bonds not eligible for TRACE reporting. The key results are robust to allowances for changes in variables, such as interest rate volatility and trading activity, which might also affect execution costs. We al...