Choosing a trading counterpart in the U.S. acid rain market
In this paper we study the determinants of the counterpart choice in the U.S. market for SO2 allowances. Counterparts can be chosen among three alternatives proved to be independent: market makers, brokers or private. Privates are mostly U.S. electricity generators. We find that the SO2 allowances market, as the electricity market, is regionalized. The national dimension only appears when there are local imbalances that give incentives to search for a better price outside of the region. Additionally, our results suggest that agents like counterpart differentiation i.e. they value positively the presence of few market makers, possibly with large stocks but they also value positively the presence of many brokers (and privates). In line with previous literature results, we also find agents prefer market makers when placing large size orders and that the preference for market makers increases on time due to the increase in the counterpart risk. Finally, we also identify the influence of the regulatory framework, i.e. the division in phases and the chosen allowance surrender date, in the counterpart choice. The previous results are robust to Enron's abnormal behavior during 2000-2001 and its posterior bankruptcy.
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