Conflicted Immediacy Provision

77 Pages Posted: 14 Nov 2016 Last revised: 10 Aug 2021

See all articles by Yu An

Yu An

Johns Hopkins Carey Business School

Zeyu Zheng

University of California, Berkeley

Date Written: August 8, 2021

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

Suggested Citation

An, Yu and Zheng, Zeyu, Conflicted Immediacy Provision (August 8, 2021). 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 ( email )

4125 Etcheverry Hall
Berkeley, CA 94720
United States

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