Centralizing Over-The-Counter Markets?

Milena Wittwer Jason Allen - Jul 18, 2023

Working Paper No.   00109-00

In traditional over-the-counter markets, investors trade bilaterally through intermediaries. We assess whether and how to shift trades on a centralized platform with trade-level data on the Canadian government bond market. We document that intermediaries charge a markup when trading with  investors, and specify a model to quantify price and welfare effects from market centralization. We find that many investors would not use the platform, even if they could, because it is costly,  competition for investors is low, and investors value relationships with intermediaries. Market centralization can even decrease welfare, unless  competition is sufficiently strong.

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