A Theory of Participation in OTC and Centralized Markets
Dugast, Jérôme; Uslu, Semih; Weill, Pierre-Olivier (2022), A Theory of Participation in OTC and Centralized Markets, The Review of Economic Studies, 89, 6, p. 3223–3266. 10.1093/restud/rdac010
TypeArticle accepté pour publication ou publié
Journal nameThe Review of Economic Studies
Oxford University Press
MetadataShow full item record
Dauphine Recherches en Management [DRM]
Johns Hopkins University
Center for Economic Policy Research [CEPR]
Abstract (EN)Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we study a model in which banks make costly decisions to participate in an OTC market, a centralized market, or both markets at the same time. Banks differ in their ability to take large positions, what we call their trading capacity. In equilibrium, intermediate-capacity banks find it optimal to participate in the centralized market. In contrast, low- and high-capacity banks find it optimal to participate in the OTC market, due to an endogenous complementarity. Namely, low-capacity banks receive worse terms of trade than in the centralized market but better risk sharing, thanks to the intermediation services offered by high-capacity banks. High-capacity banks receive worse risk sharing than in the centralized market, but profit from the provision of intermediation services to low-capacity banks. While the social optimum has qualitatively similar participation patterns, it prescribes that more customers migrate to the centralized market, and that more dealers enter the OTC market.
Subjects / KeywordsOTC Markets; Heterogeneity; Intermediation; Composition Externalities; Government Intervention
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