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Centralizing Over-the-Counter Markets?

Jason Allen and Milena Wittwer

Staff Working Papers from Bank of Canada

Abstract: In traditional over-the-counter (OTC) markets, investors trade bilaterally through intermediaries referred to as dealers. An important regulatory question is whether to centralize OTC markets by shifting trades onto centralized platforms. We address this question in the context of the liquid Canadian government bond market. We document that dealers charge markups even in this market and show that there is a price gap between large investors who have access to a centralized platform and small investors who do not. We specify a model to quantify how much of this price gap is due to platform access and assess welfare effects. The model predicts that not all investors would use the platform even if platform access were universal. Nevertheless, the price gap would close by 32%–47%. Welfare would increase by 9%–30% because more trades are conducted by dealers who have high values to trade.

Keywords: Financial institutions; Market structure and pricing (search for similar items in EconPapers)
JEL-codes: D40 D47 G10 G20 L10 (search for similar items in EconPapers)
Pages: 71 pages
Date: 2021-08
New Economics Papers: this item is included in nep-cwa, nep-isf and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

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