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Do we need dealers in OTC markets?

Author

Listed:
  • Terrence Hendershott

    (University of California, Berkeley - Haas School of Business)

  • Dmitry Livdan

    (University of California, Berkeley)

  • Norman Schürhoff

    (University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR))

Abstract

We examine technology enabling dispersed investors to directly trade with each other in over-the-counter markets via the largest electronic trading platform in corporate bonds starting Open Trading (OT) to allow investor-to-investor trading. Over our six-year sample, OT steadily grew to win 12% of trades on the platform, with 2% being investor-to-investor trading, 3% being dealers trading with new clients, and 7% being new liquidity providers acting like dealers. This suggests that investors in corporate bonds prefer intermediation to direct trade. However, OT can enable new dealers to compete in liquidity provision. OT's steady growth facilitates measuring its effect on investors, dealers, and competition to provide liquidity using an auction model.

Suggested Citation

  • Terrence Hendershott & Dmitry Livdan & Norman Schürhoff, 2021. "Do we need dealers in OTC markets?," Swiss Finance Institute Research Paper Series 21-43, Swiss Finance Institute.
    • Handle: RePEc:chf:rpseri:rp2143
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    Keywords

    Over-the-counter markets; electronic trading; request for quote; open trading; corporate bonds; dealers;
    All these keywords.

    JEL classification:

    • 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
    • G19 - Financial Economics - - General Financial Markets - - - Other

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