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Electronic Trading in OTC Markets vs. Centralized Exchange

Author

Listed:
  • Ying Liu

    (University of Lausanne and Swiss Finance Institute)

  • Sebastian Vogel

    (Ecole Polytechnique Fédérale de Lausanne)

  • Yuan Zhang

    (Ecole Polytechnique Fédérale de Lausanne)

Abstract

We model a two-tiered market structure in which an investor can trade an asset on a trading platform with a set of dealers who in turn have access to an interdealer market. The investor's order is informative about the asset's payoff and dealers who were contacted by the investor use this information in the interdealer market. Increasing the number of contacted dealers lowers markups through competition but increases the dealers' costs of providing the asset through information leakage. We then compare a centralized market in which investors can trade among themselves in a central limit order book to a market in which investors have to use the electronic platform to trade the asset. With imperfect competition among dealers, investor welfare is higher in the centralized market if private values are strongly dispersed or if the mass of investors is large.

Suggested Citation

  • Ying Liu & Sebastian Vogel & Yuan Zhang, 2018. "Electronic Trading in OTC Markets vs. Centralized Exchange," Swiss Finance Institute Research Paper Series 18-19, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp1819
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    File URL: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3013615
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    Citations

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    Cited by:

    1. Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets [Trade Dynamics in the Market for Federal Funds]," The Review of Economic Studies, Review of Economic Studies Ltd, vol. 89(6), pages 3223-3266.
    2. Jason Allen & Milena Wittwer, 2023. "Centralizing Over-the-Counter Markets?," Journal of Political Economy, University of Chicago Press, vol. 131(12), pages 3310-3351.
    3. Pierre-Olivier Weill, 2020. "The search theory of OTC markets," NBER Working Papers 27354, National Bureau of Economic Research, Inc.
    4. Gabrovski, Miroslav & Kospentaris, Ioannis, 2021. "Intermediation in over-the-counter markets with price transparency," Journal of Economic Theory, Elsevier, vol. 198(C).

    More about this item

    Keywords

    OTC markets; RFQ; market design; electronic trading; dealer intermediation;
    All these keywords.

    JEL classification:

    • D44 - Microeconomics - - Market Structure, Pricing, and Design - - - Auctions
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information; Mechanism Design
    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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