Electronic Trading in OTC Markets vs. Centralized Exchange

Liu, Ying; Vogel, Sebastian; Zhang, Yuan

doi:10.2139/ssrn.3189834

Cited by 10 publications

(6 citation statements)

References 38 publications

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“…This gives more flexibility to introduce a variety of asymmetric information frictions. A branch of the literature provides comparative static analysis, comparing outcomes across exogenously given market structures, some centralized and other decentralized, or across decentralized structures with varying levels of frictions: Biais (1993), Colliard, Foucault, and Hoffmann (2018), Glode and Opp (2019), Malamud and Rostek (2017), , Li and Song (2019), Liu, Vogel, and Zhang (2018) and Vogel (2019).…”

Section: Otc Versus Centralized Tradementioning

confidence: 99%

The Search Theory of OTC Markets

Weill

2020

SSRN Journal

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Section: Otc Versus Centralized Tradementioning

confidence: 99%

The Search Theory of OTC Markets

Weill

2020

SSRN Journal

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“…A branch of the literature compares the costs and benefits associated with centralized and decentralized trading structures without endogenous participation decision. See, for example, Geromichalos and Herrenbrueck (2016), Liu, Vogel, and Zhang (2018), Li and Song (2019), Vogel (2019), Glode andOpp (2020), andColliard, Foucault, andHoffmann (2021). Another branch of the literature has studied the trade-off between exclusive participation in a centralized or a decentralized market.…”

Section: Literature Reviewmentioning

confidence: 99%

A Theory of Participation in OTC and Centralized Markets

2019

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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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“…Our theory lies in between the theoretical literature on OTC markets (following Duffie et al (2005)) and a large theoretical literature that studies decentralized or fragmented financial markets (with recent work by Glode and Opp (2019); Chen and Duffie (2021); Rostek and Yoon (2020); Wittwer (2021Wittwer ( , 2020). Similar to a few other papers, our model focuses on the selection of investors into trading venues (e.g., Liu et al (2018); Vogel (2019)). 6 Different from these papers, we highlight the importance of benchmark prices, as in Duffie et al (2017), but we endogenize them.…”

Section: Introductionmentioning

confidence: 99%

“…This happens when the investor draws an extreme liquidity shock that lies above the dealer's value, and captures the idea that a dealer is willing to occasionally help an investor in need to sustain their bilateral relationship.15 Our auction-game is a possible micro-foundation for why trade yields relate to quotes, as in equation (3). As an alternative, we could formalize the fact that a dealer might not respond in an RFQ auction (as inLiu et al (2018);Riggs et al (2020)).…”

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confidence: 99%