Over-the-Counter vs. Limit-Order Markets: The Role of Traders' Expertise

64 Pages Posted: 3 Dec 2015 Last revised: 9 Nov 2018

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Christian C. Opp

University of Pennsylvania - The Wharton School

Date Written: November 8, 2018

Abstract

Over-the-counter (OTC) markets attract substantial trading volume despite exhibiting frictions absent in centralized limit-order markets. We compare the efficiency of OTC and limit-order markets when traders' expertise is endogenous. We show that asymmetric access to counterparties in OTC markets yields increased rents to expertise acquisition for a few well-connected core traders. When the existence of gains to trade is uncertain, traders' higher expertise in OTC markets can improve allocative efficiency. In contrast, when expertise primarily causes adverse selection, competitive limit-order markets tend to dominate. Our model provides guidance for policymakers and empiricists evaluating the efficiency of market structures.

Keywords: Asymmetric Information, OTC Trading, Centralized Markets, Rent-seeking, Market Power

JEL Classification: D82, G23, L10

Suggested Citation

Glode, Vincent and Opp, Christian C., Over-the-Counter vs. Limit-Order Markets: The Role of Traders' Expertise (November 8, 2018). Available at SSRN: https://ssrn.com/abstract=2697281 or http://dx.doi.org/10.2139/ssrn.2697281

Vincent Glode

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Christian C. Opp (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States
215-573-3186 (Phone)

Register to save articles to
your library

Register

Paper statistics

Downloads
438
rank
62,832
Abstract Views
1,771
PlumX Metrics