OTC Microstructure in a period of stress: A Multi-layered network approach

How does the microstructure of an over-the-counter market respond in a time of stress? We test several hypotheses of network-based models by analysing the 2015 crash of the Swiss franc-euro FX derivatives market. To do so we employ unique data at transaction and counterparty identity level, and a new analytical framework that uses the trading network topology to segment the market into a multi-layered structure. We document limited intermediation by inner-core nodes, in particular dealers with loss making outstanding positions. Clients in greater need of trading were less likely to trade, pointing to a supply driven liquidity shortage. However, more central and better connected clients were able to access the market sooner and at better prices than more peripheral clients, lending support to theory predictions that network centrality matters for sourcing liquidity and execution quality.