Dealer networks, client sophistication and pricing in OTC derivatives

Vidya Kamate and Abhishek Kumar

Journal of International Money and Finance, 2024, vol. 140, issue C

Abstract: Using a novel regulatory transaction-level dataset, we analyze determinants of pricing in both dealer-to-dealer (D2D) and dealer-to-client (D2C) segments of over-the-counter (OTC) currency derivatives market enabling us to provide new empirical insights into frictions driving pricing in both segments separately and interplay of these frictions jointly. The interdealer network exhibits a core-periphery structure with core dealers charging centrality premia in both D2D and D2C segments. By acting as principal and prearranging fewer trades, they provide execution immediacy besides receiving the opportunity to internalize flows. In D2C segment, sophisticated clients experience a reduction in centrality premium alluding to an interplay of client bargaining power and dealer centrality in pricing.

Keywords: Currency derivatives; Foreign exchange; OTC markets; Centrality; Network; Bargaining power (search for similar items in EconPapers)
JEL-codes: F31 G13 G15 L14 (search for similar items in EconPapers)
Date: 2024
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:140:y:2024:i:c:s0261560623001870

DOI: 10.1016/j.jimonfin.2023.102986

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