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Dealer Networks

67 Pages Posted: 16 Mar 2012 Last revised: 30 Oct 2014

Dan Li

Federal Reserve Board

Norman Schürhoff

University of Lausanne; Swiss Finance Institute; Centre for Economic Policy Research (CEPR)

Multiple version iconThere are 2 versions of this paper

Date Written: October 22, 2014


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.

Keywords: Municipal bonds, over-the-counter financial market, trading cost, liquidity, immediacy, transparency, decentralization, market quality, network analysis

JEL Classification: G12, G14, G24

Suggested Citation

Li, Dan and Schürhoff, Norman, Dealer Networks (October 22, 2014). Swiss Finance Institute Research Paper No. 14-50. Available at SSRN: or

Dan Li (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Mail Stop 89
Washington, DC 20551
United States

Norman Schürhoff

University of Lausanne ( email )

Extranef 228
CH-1015 Lausanne
+41 (0)21 692 3447 (Phone)
+41 (0)21 692 3435 (Fax)

Swiss Finance Institute ( email )

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CH-1211 Geneva 4

Centre for Economic Policy Research (CEPR) ( email )

77 Bastwick Street
London, EC1V 3PZ
United Kingdom

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