Competing for order flow in OTC markets

Benjamin Lester, Guillaume Rocheteau and Pierre-Olivier Weill

No 14-9, Working Papers from Federal Reserve Bank of Philadelphia

Abstract: The authors develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades, which can include prices, quantities, and execution times, and investors direct their orders toward dealers that offer the most attractive terms of trade. Equilibrium outcomes have the following properties. First, investors face a trade-off between trading costs and speeds of execution. Second, the asset market is endogenously segmented in the sense that investors with different asset valuations and different asset holdings will trade at different speeds and different costs. For example, under a Leontief technology to match investors and dealers, per unit trading costs decrease with the size of the trade, in accordance with the evidence from the market for corporate bonds. Third, dealers? implicit bargaining powers are endogenous and typically vary across sub-markets. Finally, the authors obtain a rich set of comparative statics both analytically, by studying a limiting economy where trading frictions are small, and numerically. For instance, the authors find that the relationship between trading costs and dealers? bargaining power can be hump-shaped.

Keywords: Over-the-counter markets; OTC Markets; Order Flow (search for similar items in EconPapers)
Pages: 50 pages
Date: 2014-03-13
New Economics Papers: this item is included in nep-fmk and nep-mst
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (16)

Downloads: (external link)
https://www.philadelphiafed.org/-/media/frbp/asset ... pers/2014/wp14-9.pdf (application/pdf)

Related works:
Journal Article: Competing for Order Flow in OTC Markets (2015)
Working Paper: Competing for Order Flow in OTC Markets (2015)
Working Paper: Competing for Order Flow in OTC Markets (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedpwp:14-9

Ordering information: This working paper can be ordered from

Access Statistics for this paper

More papers in Working Papers from Federal Reserve Bank of Philadelphia Contact information at EDIRC.
Bibliographic data for series maintained by Beth Paul ().