Conflicted Immediacy Provision
77 Pages Posted: 14 Nov 2016 Last revised: 10 Aug 2021
Date Written: August 8, 2021
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
Suggested Citation: Suggested Citation