Competing for Order Flow in OTC Markets

Benjamin Lester, Guillaume Rocheteau and Pierre-Olivier Weill

No 20608, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We 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 speed--and investors direct their orders toward dealers that offer the most attractive terms. We characterize the equilibrium in a general setting, and illustrate how the model can account for several important trading patterns in over-the-counter markets which do not emerge from existing models. We then study two special cases which allow us to highlight the differences between these existing models, which assume investors engage in random search for dealers and then use ex post bargaining to determine prices, and our model, which utilizes the concept of competitive search in which dealers post terms of trade. Finally, we calibrate our model, illustrate that it generates reasonable quantitative outcomes, and use it to study how trading frictions affect the per-unit trading costs that investors pay in equilibrium.

JEL-codes: D53 D83 G1 G12 (search for similar items in EconPapers)
Date: 2014-10
New Economics Papers: this item is included in nep-fmk and nep-mst
Note: AP EFG
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (10)

Published as Benjamin Lester & Guillaume Rocheteau & Pierre‐Olivier Weill, 2015. "Competing for Order Flow in OTC Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 77-126, 06.

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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)
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