Immediacy Provision and Matchmaking
81 Pages Posted: 14 Nov 2016 Last revised: 20 Jan 2022
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: Suggested Citation