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Dealer networks, client sophistication and pricing in OTC derivatives

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  • Kamate, Vidya
  • Kumar, Abhishek

Abstract

Using a novel regulatory transaction-level dataset, we analyze determinants of pricing in both dealer-to-dealer (D2D) and dealer-to-client (D2C) segments of over-the-counter (OTC) currency derivatives market enabling us to provide new empirical insights into frictions driving pricing in both segments separately and interplay of these frictions jointly. The interdealer network exhibits a core-periphery structure with core dealers charging centrality premia in both D2D and D2C segments. By acting as principal and prearranging fewer trades, they provide execution immediacy besides receiving the opportunity to internalize flows. In D2C segment, sophisticated clients experience a reduction in centrality premium alluding to an interplay of client bargaining power and dealer centrality in pricing.

Suggested Citation

  • Kamate, Vidya & Kumar, Abhishek, 2024. "Dealer networks, client sophistication and pricing in OTC derivatives," Journal of International Money and Finance, Elsevier, vol. 140(C).
    • Handle: RePEc:eee:jimfin:v:140:y:2024:i:c:s0261560623001870
    DOI: 10.1016/j.jimonfin.2023.102986
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    More about this item

    Keywords

    Currency derivatives; Foreign exchange; OTC markets; Centrality; Network; Bargaining power;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • G13 - Financial Economics - - General Financial Markets - - - Contingent Pricing; Futures Pricing
    • G15 - Financial Economics - - General Financial Markets - - - International Financial Markets
    • L14 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - Transactional Relationships; Contracts and Reputation

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