A Theory of Participation in OTC and Centralized Markets

Jérôme Dugast, Semih Üslü and Pierre-Olivier Weill

No 25887, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: G0 G1 (search for similar items in EconPapers)
Date: 2019-05
New Economics Papers: this item is included in nep-ban
Note: AP EFG ME
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Citations: View citations in EconPapers (12)

Published as Jérôme Dugast & Semih Üslü & Pierre-Olivier Weill, 2022. "A Theory of Participation in OTC and Centralized Markets," The Review of Economic Studies, vol 89(6), pages 3223-3266.

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Journal Article: A Theory of Participation in OTC and Centralized Markets (2022)
Working Paper: A Theory of Participation in OTC and Centralized Markets (2022)
Working Paper: A Theory of Participation in OTC and Centralized Markets (2019)
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