Immediacy Provision and Matchmaking

81 Pages Posted: 14 Nov 2016 Last revised: 20 Jan 2022

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Zeyu Zheng

University of California, Berkeley - Department of Industrial Engineering and Operations Research

Date Written: January 19, 2022

Abstract

Dealers can choose between two intermediation methods---providing immediacy to customers using own inventory and making matches between customers' order flows. We show that dealers have an incentive to prioritize inventory turnover for immediacy provision, rather than making matches between customers. Compared to a counterfactual scenario without this incentive, dealers in equilibrium provide immediacy to more customers in order to extract extra rents. Compared to the counterfactual, this incentive decreases equilibrium price for immediacy but increases bid-ask spread. The incentive to prioritize immediacy provision lowers welfare for assets with high substitutability, but raises welfare for assets with low substitutability. Our analysis has potential policy implications for the Volcker Rule, which can be viewed as the counterfactual.

Keywords: Immediacy Provision, Matchmaking, Welfare, Volcker Rule, Asset Heterogeneity

JEL Classification: G12, G14, G24

Suggested Citation

An, Yu and Zheng, Zeyu, Immediacy Provision and Matchmaking (January 19, 2022). Available at SSRN: https://ssrn.com/abstract=2868280 or http://dx.doi.org/10.2139/ssrn.2868280

Yu An (Contact Author)

Johns Hopkins Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Zeyu Zheng

University of California, Berkeley - Department of Industrial Engineering and Operations Research ( email )

4141 Etcheverry Hall
Berkeley, CA 94720-1777
United States

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