Dealer Networks

Dan Li and Norman Schuerhoff
Additional contact information
Dan Li: Federal Reserve Board

No 14-50, Swiss Finance Institute Research Paper Series from Swiss Finance Institute

Abstract: Dealers in over-the-counter securities form networks to mitigate search frictions. The audit trail for municipal bonds shows the dealer network has a core-periphery structure. Central dealers are more efficient at matching buyers and sellers than peripheral dealers, which shortens intermediation chains and speeds up trading. Investors face a tradeoff between execution speed and cost. Central dealers provide immediacy by pre-arranging fewer trades and holding larger inventory. However, trading costs increase strongly with dealer centrality. Investors with strong liquidity need trade with central dealers and at times of market-wide illiquidity. Central dealers thus serve as liquidity providers of last resort.

Keywords: Municipal bonds; over-the-counter financial market; trading cost; liquidity; immediacy; transparency; decentralization; market quality; network analysis (search for similar items in EconPapers)
JEL-codes: G12 G14 G24 (search for similar items in EconPapers)
Pages: 67 pages
Date: 2014-10
New Economics Papers: this item is included in nep-mst and nep-net
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http://ssrn.com/abstract=2023201 (application/pdf)

Related works:
Journal Article: Dealer Networks (2019)
Working Paper: Dealer Networks (2014)
Working Paper: Dealer Networks (2014)
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Persistent link: https://EconPapers.repec.org/RePEc:chf:rpseri:rp1450

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