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Competition and Information Leakage

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  • Markus Baldauf
  • Joshua Mollner

Abstract

When seeking to trade in over-the-counter markets, institutional investors typically restrict both the number of potential counterparties they contact and the information they disclose (e.g., by requesting two-sided rather than one-sided quotes). We rationalize these important facts in a model featuring endogenous front-running. Although an additional contact intensifies competition and aids in finding a natural counterparty, it also intensifies information leakage—which can be costly if it helps a losing dealer to front-run. We also address information design: the client optimally provides no information about her trading direction when requesting quotes. We conclude with implications for market design and regulation.

Suggested Citation

  • Markus Baldauf & Joshua Mollner, 2024. "Competition and Information Leakage," Journal of Political Economy, University of Chicago Press, vol. 132(5), pages 1603-1641.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/727709
    DOI: 10.1086/727709
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