Dealer Intermediation between Markets

Peter Dunne, Harald Hau and Michael Moore

No 12-29, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: We develop a dynamic model of dealer intermediation between a monopolistic customerdealer (B2C) market and a competitive inter-dealer (B2B) market. Dealers face inventory constraints and adverse selection. We characterize the optimal quote setting and inventory management behavior for both markets in closed form and reveal how price setting in one market segment influences quote behavior in the other. The framework features a unique stable equilibrium for bid and ask quotes in both market segments. We show under which conditions dealer intermediation improves welfare over a spot trading venue which clears synchronous customer demand only, and how increased customer sophistication can make market breakdown more likely at high levels of price volatility. Data from the European sovereign bond market is used to illustrate some of the empirical implications.

Keywords: Dealer Intermediation; Spread Determination; Adverse Selection; Market Segmentation (search for similar items in EconPapers)
JEL-codes: G14 G24 (search for similar items in EconPapers)
Pages: 46 pages
Date: 2012-08
New Economics Papers: this item is included in nep-mst
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Citations: View citations in EconPapers (4)

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Related works:
Journal Article: DEALER INTERMEDIATION BETWEEN MARKETS (2015)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1229

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