A Theory of Participation in OTC and Centralized Markets

Semih Uslu, Jerome Dugast, Pierre-Olivier Weill  , - Sep 29, 2021

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.


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price informativeness over-the-counter markets Risk sharing heterogeneity bargaining intermediation core-periphery government intervention




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A Theory of Participation in OTC and Centralized Markets

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A Theory of Participation in OTC and Centralized Markets

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