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Dealer Networks

Dan Li

Federal Reserve Board

Norman Schürhoff

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

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Date posted: March 16, 2012 ; Last revised: October 30, 2014

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

Contact Information

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 )
c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Centre for Economic Policy Research (CEPR) ( email )
77 Bastwick Street
London, EC1V 3PZ
United Kingdom
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