Federal Reserve Board
University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)
October 22, 2014
Swiss Finance Institute Research Paper No. 14-50
Dealers in over-the-counter securities form networks to mitigate search frictions. The audit trail for municipal bonds shows the dealer network has a core-periphery structure. Central dealers are more efficient at matching buyers and sellers than peripheral dealers, which shortens intermediation chains and speeds up trading. Investors face a tradeoff between execution speed and cost. Central dealers provide immediacy by pre-arranging fewer trades and holding larger inventory. However, trading costs increase strongly with dealer centrality. Investors with strong liquidity need trade with central dealers and at times of market-wide illiquidity. Central dealers thus serve as liquidity providers of last resort.
Number of Pages in PDF File: 67
Keywords: Municipal bonds, over-the-counter financial market, trading cost, liquidity, immediacy, transparency, decentralization, market quality, network analysis
JEL Classification: G12, G14, G24
Date posted: March 16, 2012 ; Last revised: October 30, 2014
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