Regulation and security design in concentrated markets

Ana Babus and Kinda Hachem

Journal of Monetary Economics, 2021, vol. 121, issue C, 139-151

Abstract: Regulatory debates about centralized trading assume security design is immune to market structure. We consider a regulator who introduces an exchange to increase liquidity, understanding that security design is endogenous. For a given security, investors would like to trade in a larger market and, for a given market structure, they would like to trade a safer security. We show that financial intermediaries design riskier securities after the exchange is introduced, even when the exchange leads to the origination of safer underlying assets. The results reflect a relative dilution of investor market power and motivate coordinated policies to improve investor welfare.

Keywords: Security design; Market structure; Market power (search for similar items in EconPapers)
JEL-codes: D47 D86 G23 (search for similar items in EconPapers)
Date: 2021
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Citations: View citations in EconPapers (2)

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Related works:
Working Paper: Regulation and Security Design in Concentrated Markets (2021)
Working Paper: Regulation and Security Design in Concentrated Markets (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:moneco:v:121:y:2021:i:c:p:139-151

DOI: 10.1016/j.jmoneco.2021.05.003

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