A Theory of Participation in OTC and Centralized Markets

Jérôme Dugast, Semih Üslü and Pierre-Olivier Weill
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Jérôme Dugast: DRM - Dauphine Recherches en Management - Université Paris Dauphine-PSL - PSL - Université Paris Sciences et Lettres - CNRS - Centre National de la Recherche Scientifique

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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 (search for similar items in EconPapers)
Date: 2022
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Citations: View citations in EconPapers (5)

Published in Review of Economic Studies, 2022, 89 (6), ⟨10.1093/restud/rdac010⟩

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Related works:
Journal Article: 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:hal:journl:hal-03962911

DOI: 10.1093/restud/rdac010

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