Dealer Networks

79 Pages Posted: 16 Mar 2012 Last revised: 27 Mar 2018

See all articles by Dan Li

Dan Li

Board of Governors of the Federal Reserve System

Norman Schuerhoff

Swiss Finance Institute - HEC Lausanne

Multiple version iconThere are 2 versions of this paper

Date Written: February 2, 2018


Dealers in the over-the-counter municipal bond market form trading networks with other dealers to mitigate search frictions. Regulatory audit trail data show the dealer network has a core-periphery structure with 10 to 30 hubs and over 2,000 peripheral broker-dealers in which bonds flow in a chain from periphery to core and partially back. Central dealers charge up to double the roundtrip markups to investors compared to peripheral dealers. In turn, central dealers provide immediacy by matching buyers with sellers more directly and prearranging fewer trades than peripheral dealers, especially during stress times. Investors thus face a tradeoff between execution cost and speed, consistent with network models of decentralized trade.

Keywords: Municipal bonds, over-the-counter market, financial network, dealer centrality, trading cost, immediacy, liquidity

JEL Classification: G12, G14, G24

Suggested Citation

Li, Dan and Schuerhoff, Norman, Dealer Networks (February 2, 2018). Journal of Finance, Forthcoming, Swiss Finance Institute Research Paper No. 14-50, Available at SSRN: or

Dan Li (Contact Author)

Board of Governors of the Federal Reserve System ( email )

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

Norman Schuerhoff

Swiss Finance Institute - HEC Lausanne ( email )


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