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Dealer Networks


  • Li, Dan
  • Schürhoff, Norman


Dealers in over-the-counter securities form networks to mitigate search frictions. The audit trail for municipal bonds shows the dealer network has a core-periphery structure. Central dealers are more efficient at matching buyers and sellers than peripheral dealers, which shortens intermediation chains and speeds up trading. Investors face a tradeoff between execution speed and cost. Central dealers provide immediacy by pre-arranging fewer trades and holding larger inventory. However, trading costs increase strongly with dealer centrality. Investors with strong liquidity need trade with central dealers and at times of market-wide illiquidity. Central dealers thus serve as liquidity providers of last resort.

Suggested Citation

  • Li, Dan & Schürhoff, Norman, 2014. "Dealer Networks," CEPR Discussion Papers 10237, C.E.P.R. Discussion Papers.
  • Handle: RePEc:cpr:ceprdp:10237

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    References listed on IDEAS

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    Cited by:

    1. Craig, Ben & von Peter, Goetz, 2014. "Interbank tiering and money center banks," Journal of Financial Intermediation, Elsevier, vol. 23(3), pages 322-347.
    2. Marco D'Errico & Stefano Battiston & Tuomas Peltonen & Martin Scheicher, 2016. "How does risk flow in the credit default swap market?," ESRB Working Paper Series 33, European Systemic Risk Board.
    3. Andreas Karpf & Antoine Mandel & Stefano Battiston, 2015. "A network-based analysis of the European Emission Market," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) halshs-01243694, HAL.
    4. Teruyoshi Kobayashi & Taro Takaguchi, 2017. "Significant ties: Identifying relationship lending in temporal interbank networks," Discussion Papers 1717, Graduate School of Economics, Kobe University.
    5. Gofman, Michael, 2017. "Efficiency and stability of a financial architecture with too-interconnected-to-fail institutions," Journal of Financial Economics, Elsevier, vol. 124(1), pages 113-146.
    6. repec:eee:jfinec:v:125:y:2017:i:1:p:200-215 is not listed on IDEAS
    7. Marco Di Maggio & Amir Kermani & Zhaogang Song, 2016. "The Value of Trading Relationships in Turbulent Times," NBER Working Papers 22332, National Bureau of Economic Research, Inc.
    8. Babus, Ana & Hu, Tai-Wei, 2017. "Endogenous intermediation in over-the-counter markets," Journal of Financial Economics, Elsevier, vol. 125(1), pages 200-215.
    9. de Roure, Calebe, 2016. "Fire buys of central bank collateral assets," Discussion Papers 51/2016, Deutsche Bundesbank.

    More about this item


    decentralization; immediacy; liquidity; market quality; municipal bonds; network analysis; over-the-counter financial market; trading cost; transparency;

    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
    • G24 - Financial Economics - - Financial Institutions and Services - - - Investment Banking; Venture Capital; Brokerage

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