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Which Inter-dealer Market Prevails? An analysis of inter-dealer trading in opaque markets

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  • Victoria Saporta
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    Abstract

    A number of dealership markets share three common features: customer-dealer trades remain undisclosed, inter-dealer trading forms a substantial part of total trading and dealers have a choice, when dealing with each other, between doing so directly and using an inter-dealer broker (IDB). Using a three-stage market microstructure model, we show that for dealers who have executed undisclosed customer trades, their choice depends on the number of firms who operate as dealers: trading through the IDB being preferable when more than a critical number of dealers participate in the industry and vice versa. Comparative static effects of information asymmetry and market transparency on the critical number of dealers are derived. Subject to a monotonicity constraint, a condition is derived determining which form of inter-dealer market will prevail.

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    File URL: http://www.bankofengland.co.uk/archive/Documents/historicpubs/workingpapers/1997/wp59.pdf
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    Paper provided by Bank of England in its series Bank of England working papers with number 59.

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    Date of creation: Mar 1997
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    Handle: RePEc:boe:boeewp:59

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    1. Pagano, Marco, 1989. "Trading Volume and Asset Liquidity," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 104(2), pages 255-74, May.
    2. Marco Pagano & Ailsa Roell, 1990. "Auction Markets, Dealership Markets and Execution Risk," CEPR Financial Markets Paper, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ 0008, European Science Foundation Network in Financial Markets, c/o C.E.P.R, 77 Bastwick Street, London EC1V 3PZ.
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    Cited by:
    1. Nicolas Audet & Toni Gravelle & Jing Yang, 2002. "Alternative Trading Systems: Does One Shoe Fit All?," Working Papers, Bank of Canada 02-33, Bank of Canada.
    2. Cristian Ionescu, 2012. "Incomplete Markets and Financial Instability. The Role of Information," Annals of the University of Petrosani, Economics, University of Petrosani, Romania, University of Petrosani, Romania, vol. 12(1), pages 141-150.
    3. Törbjörn I. Becker & Amadou N. R. Sy, 2005. "Were Bid-Ask Spreads in the Foreign Exchange Market Excessive During the Asian Crisis?," IMF Working Papers 05/34, International Monetary Fund.
    4. J.Ramon Martinez-Resano, 2005. "Size And Heterogeneity Matter. A Microstructure-Based Analysis Of Regulation Of Secondary Markets For Government Bonds," Finance, EconWPA 0508007, EconWPA.

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