Dealer Networks

68 Pages Posted: 5 Dec 2014

See all articles by Dan Li

Dan Li

Board of Governors of the Federal Reserve System

Norman Schürhoff

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

Date Written: November 10, 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, network analysis, trading cost, liquidity, immediacy, transparency

JEL Classification: G12, G14, G24

Suggested Citation

Li, Dan and Schürhoff, Norman, Dealer Networks (November 10, 2014). FEDS Working Paper No. 2014-95. Available at SSRN: or

Dan Li (Contact Author)

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
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 )

United Kingdom

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