A Theory of Participation in OTC and Centralized Markets / Jérôme Dugast, Semih Üslü, Pierre-Olivier Weill.

Format:

Book

Author/Creator:

Dugast, Jérôme.

Contributor:

National Bureau of Economic Research.

Üslü, Semih.

Weill, Pierre-Olivier.

Series:

Working Paper Series (National Bureau of Economic Research) no. w25887.

NBER working paper series no. w25887

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 2019.

Summary:

Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we study a model in which banks make costly decisions to participate in an OTC market, a centralized market, or both markets at the same time. Banks differ in their ability to take large positions, what we call their trading capacity. In equilibrium, intermediate-capacity banks find it optimal to participate in the centralized market. In contrast, low- and high-capacity banks find it optimal to participate in the OTC market, due to an endogenous complementarity. Namely, low capacity banks receive worse terms of trade than in the centralized market but better risk sharing, thanks to the intermediation services offered by high-capacity banks. High-capacity banks receive worse risk sharing than in the centralized market, but profit from the provision of intermediation services to low-capacity banks. While the social optimum has qualitatively similar participation patterns, it prescribes that more customers migrate to the centralized market, and that more dealers enter the OTC market.

Notes:

Print version record

May 2019.