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Dealer Networks

Listed author(s):
  • 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.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 10237.

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Date of creation: Nov 2014
Handle: RePEc:cpr:ceprdp:10237
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