Conflicted Immediacy Provision

Abstract

The two roles of a dealer, immediacy provision and matchmaking, create a conflict of interest---the dealer prioritizes inventory turnover for immediacy provision, rather than making matches between customers. Compared to a counterfactual scenario without this conflict, dealers in equilibrium provide immediacy to more customers in order to extract extra rents. Compared to the counterfactual, this conflict decreases equilibrium price for immediacy but increases bid-ask spread. The conflict 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, conflict of interest, bid-ask spread, Volcker Rule

JEL Classification: G12, G14, G24