A Theory of Participation in OTC and Centralized Markets

Jérôme Dugast, Semih Üslü and Pierre-Olivier Weill

The Review of Economic Studies, 2022, vol. 89, issue 6, 3223-3266

Abstract: 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.

Keywords: OTC markets; Heterogeneity; Intermediation; Composition externalities; Government intervention; G11; G12; G21 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

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Working Paper: A Theory of Participation in OTC and Centralized Markets (2022)
Working Paper: A Theory of Participation in OTC and Centralized Markets (2019)
Working Paper: A Theory of Participation in OTC and Centralized Markets (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:oup:restud:v:89:y:2022:i:6:p:3223-3266.

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