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Centralizing Over-the-Counter Markets?

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  • Jason Allen
  • Milena Wittwer

Abstract

In traditional over-the-counter markets, investors trade bilaterally through intermediaries. We assess whether and how to shift trades on a centralized platform with trade-level data on the Canadian government bond market. We document that intermediaries charge a markup when trading with investors and specify a model to quantify price and welfare effects from market centralization. We find that many investors would not use the platform, even if they could, because it is costly, competition for investors is low, and investors value relationships with intermediaries. Market centralization can even decrease welfare, unless competition is sufficiently strong.

Suggested Citation

  • Jason Allen & Milena Wittwer, 2023. "Centralizing Over-the-Counter Markets?," Journal of Political Economy, University of Chicago Press, vol. 131(12), pages 3310-3351.
    • Handle: RePEc:ucp:jpolec:doi:10.1086/725361
    DOI: 10.1086/725361
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    Citations

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    Cited by:

    1. Kerssenfischer, Mark & Helmus, Caspar, 2024. "Outages in sovereign bond markets," Working Paper Series 2944, European Central Bank.
    2. Jason Allen & Ali Hortaçsu & Eric Richert & Milena Wittwer, 2024. "Entry and Exit in Treasury Auctions," Staff Working Papers 24-29, Bank of Canada.
    3. Haoyang Liu & Zhaogang Song & James Vickery, 2021. "Defragmenting Markets: Evidence from Agency MBS," Staff Reports 965, Federal Reserve Bank of New York.
    4. Coen, Jamie & Coen, Patrick, 2022. "A structural model of liquidity in over‑the‑counter markets," Bank of England working papers 979, Bank of England.
    5. Bruno Jullien & Alessandro Pavan & Marc Rysman, 2021. "Two-sided markets, pricing, and network effects," Post-Print hal-03828345, HAL.
    6. Pinter, Gabor & Uslu, Semih, 2022. "Comparing search and intermediation frictions across markets," Bank of England working papers 974, Bank of England.
    7. Hendershott, Terrence & Li, Dan & Livdan, Dmitry & Schürhoff, Norman, 2024. "When failure is an option: Fragile liquidity in over-the-counter markets," Journal of Financial Economics, Elsevier, vol. 157(C).
    8. Jason Allen & Jakub Kastl & Milena Wittwer, 2020. "Maturity Composition and the Demand for Government Debt," Staff Working Papers 20-29, Bank of Canada.
    9. Rostek, Marzena, 2021. "Comments on “Regulation and security design in concentrated markets” by A. Babus and K. Hachem (2021)," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 152-154.
    10. Ari Kutai & Daniel Nathan & Milena Wittwer, 2024. "Exchanges for government bonds? Evidence during COVID-19," Bank of Israel Working Papers 2024.03, Bank of Israel.
    11. Abudy, Menachem (Meni) & Shust, Efrat, 2023. "Does market design contribute to market stability? Indications from a corporate bond exchange during the COVID-19 crisis," Journal of Economics and Business, Elsevier, vol. 123(C).

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    More about this item

    JEL classification:

    • D40 - Microeconomics - - Market Structure, Pricing, and Design - - - General
    • D47 - Microeconomics - - Market Structure, Pricing, and Design - - - Market Design
    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • L10 - Industrial Organization - - Market Structure, Firm Strategy, and Market Performance - - - General

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