Reducing Opacity in Over-the-Counter Markets
63 Pages Posted: 14 Mar 2012 Last revised: 10 Sep 2018
Date Written: June 26, 2015
In this paper, I evaluate how a centralized market impacts the opacity of an over-the-counter (OTC) market. I show that a competitive centralized market provides an incentive for dealers in the OTC market to reduce opacity, whereas a noncompetitive centralized market does not. Competition between the competitive centralized market and the OTC market forces dealers in the latter to reduce opacity. With the noncompetitive centralized market, opportunities for collusion provide an incentive for dealers to increase opacity. Specifically, the natural monopoly market maker in the noncompetitive centralized market coordinates his spread according to dealers’ spreads to profit from opacity.
Keywords: Market Microstructure, Over-the-Counter, Transparency
JEL Classification: G14, G18, D83, D81
Suggested Citation: Suggested Citation