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Reducing opacity in over-the-counter markets

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  • Zhong, Zhuo

Abstract

In this paper, I evaluate how a centralized market impacts the opacity of an over-the-counter (OTC) market. I show that a competitive centralized market provides an incentive for dealers in the OTC market to reduce opacity, whereas a noncompetitive centralized market does not. Competition between the competitive centralized market and the OTC market forces dealers in the latter to reduce opacity. With the noncompetitive centralized market, opportunities for collusion provide an incentive for dealers to increase opacity. Specifically, the natural monopoly market maker in the noncompetitive centralized market coordinates his spread according to dealers’ spreads to profit from opacity.

Suggested Citation

  • Zhong, Zhuo, 2016. "Reducing opacity in over-the-counter markets," Journal of Financial Markets, Elsevier, vol. 27(C), pages 1-27.
    • Handle: RePEc:eee:finmar:v:27:y:2016:i:c:p:1-27
    DOI: 10.1016/j.finmar.2015.06.004
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    References listed on IDEAS

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    Cited by:

    1. Chen, Fan & Zhong, Zhuo, 2017. "Pre-trade transparency in over-the-counter bond markets," Pacific-Basin Finance Journal, Elsevier, vol. 45(C), pages 14-33.

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    More about this item

    JEL classification:

    • D83 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Search; Learning; Information and Knowledge; Communication; Belief; Unawareness
    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading

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