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Platform Trading with an OTC Market Fringe


  • Jérôme Dugast
  • Semih Uslu
  • Pierre-Olivier Weil

    (University of California - University of California)


We study the privately and socially optimal participation of investors in a centralizedplatform or in an over-the-counter (OTC) market. Investors incur costs to trade in theplatform, in the OTC market, or in both at the same time. Investors differ from eachother in risk-sharing needs and OTC market trading capacities. We show that investorswith low risk-sharing needs and large trading capacities endogenously emerge as OTCintermediaries, and have the strongest private incentives to enter the OTC market vs. thetrading platform. Investors with strong risk-sharing needs and low trading capacities endogenously emerge as OTC customers, and have the weakest private incentive to enterthe OTC market vs. the trading platform. Turning to social welfare, we provide twonecessary conditions for customers' private incentives to be excessively large relative totheir social contribution. Mandating or subsidizing trade in a centralized venue can bewelfare improving only if these conditions are satisfied. First, investors must differ mostlyin terms of OTC trading capacities. Second, participation costs must induce exclusiveparticipation decisions. Based on the empirical trading patterns generated by closed-formexamples of our model, we argue that the real-world OTC markets might satisfy thec onditions under which mandating or subsidizing centralized trade is welfare improving.

Suggested Citation

  • Jérôme Dugast & Semih Uslu & Pierre-Olivier Weil, 2018. "Platform Trading with an OTC Market Fringe," Post-Print hal-02104107, HAL.
  • Handle: RePEc:hal:journl:hal-02104107
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    References listed on IDEAS

    1. Benjamin Lester & Guillaume Rocheteau & Pierre‐Olivier Weill, 2015. "Competing for Order Flow in OTC Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 77-126, June.
    2. Julien HUGONNIER & Benjamin LESTER & Pierre-Olivier WEILL, 2014. "Heterogeneity in Decentralized Asset Markets," Swiss Finance Institute Research Paper Series 14-67, Swiss Finance Institute.
    3. Kei Kawakami, 2013. "Optimal Market Size," Department of Economics - Working Papers Series 1168, The University of Melbourne.
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    5. Maryam Farboodi & Gregor Jarosch & Guido Menzio, 2016. "Intermediation as Rent Extraction," PIER Working Paper Archive 16-026, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania, revised 01 Dec 2016.
    6. Bech, Morten L. & Atalay, Enghin, 2010. "The topology of the federal funds market," Physica A: Statistical Mechanics and its Applications, Elsevier, vol. 389(22), pages 5223-5246.
    7. Athanasios Geromichalos & Lucas Herrenbrueck, 2016. "Monetary Policy, Asset Prices, and Liquidity in Over‐the‐Counter Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 48(1), pages 35-79, February.
    8. Athanasios Geromichalos & Juan M Licari & Jose Suarez-Lledo, 2007. "Monetary Policy and Asset Prices," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 10(4), pages 761-779, October.
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    1. Ana Babus & Kinda Cheryl Hachem, 2019. "Markets for Financial Innovation," NBER Working Papers 25477, National Bureau of Economic Research, Inc.
    2. Babus, Ana & Hachem, Kinda, 2019. "Markets for Financial Innovation," CEPR Discussion Papers 13457, C.E.P.R. Discussion Papers.

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    More about this item


    over the counter; market; investements; payoff;


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