67 Pages Posted: 16 Mar 2012 Last revised: 30 Oct 2014
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: Suggested Citation
Li, Dan and Schürhoff, Norman, Dealer Networks (October 22, 2014). Swiss Finance Institute Research Paper No. 14-50. Available at SSRN: https://ssrn.com/abstract=2023201 or http://dx.doi.org/10.2139/ssrn.2023201