Regulation and Security Design in Concentrated Markets

Ana Babus and Kinda Hachem

No 28764, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Regulatory debates about centralized trading assume security design is immune to market structure. We consider a regulator who introduces an exchange to increase liquidity, understanding that security design is endogenous. For a given security, investors would like to trade in a larger market and, for a given market structure, they would like to trade a safer security. We show that financial intermediaries design riskier securities after the exchange is introduced, even when the exchange leads to the origination of safer underlying assets. The results reflect a relative dilution of investor market power and motivate coordinated policies to improve investor welfare.

JEL-codes: D47 D86 G23 (search for similar items in EconPapers)
Date: 2021-05
New Economics Papers: this item is included in nep-reg
Note: AP CF ME
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Citations: View citations in EconPapers (3)

Published as Babus, Ana & Hachem, Kinda, 2021. "Regulation and security design in concentrated markets," Journal of Monetary Economics, Elsevier, vol. 121(C), pages 139-151.

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Journal Article: Regulation and security design in concentrated markets (2021)
Working Paper: Regulation and Security Design in Concentrated Markets (2021)
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