Dealer Networks

68 Pages Posted: 10 Nov 2014

See all articles by Dan Li

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: November 2014

Abstract

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

JEL Classification: G12, G14, G24

Suggested Citation

Li, Dan and Schürhoff, Norman, Dealer Networks (November 2014). CEPR Discussion Paper No. DP10237. Available at SSRN: https://ssrn.com/abstract=2521458

Dan Li (Contact Author)

Federal Reserve Board ( email )

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Norman Schürhoff

University of Lausanne ( email )

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Swiss Finance Institute ( email )

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CH-1211 Geneva 4
Switzerland

Centre for Economic Policy Research (CEPR) ( email )

London
United Kingdom

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