To Pool or Not to Pool? Security Design in OTC Markets

40 Pages Posted: 21 Nov 2016 Last revised: 18 Dec 2019

See all articles by Vincent Glode

Vincent Glode

University of Pennsylvania - The Wharton School

Christian C. Opp

University of Rochester - Simon Business School; National Bureau of Economic Research (NBER)

Ruslan Sverchkov

University of Pennsylvania - The Wharton School

Date Written: December 17, 2019

Abstract

We study security issuers' decision whether to pool assets when facing counterparties endowed with market power, as is common in over-the-counter markets. Unlike in competitive markets, pooling assets may be suboptimal in the presence of market power --- both privately and socially --- in particular, when the potential gains from trade are large. In these cases, pooling assets reduces the elasticity of trade volume in the relevant part of the payoff distribution, exacerbating inefficient rationing associated with the exercise of market power. Our results shed light on recently observed time-variation in the prevalence of pooling in financial markets.

Keywords: Pooling, Security Design, Liquidity, Adverse Selection, Imperfect Competition, OTC Markets

JEL Classification: D82, G32, L14

Suggested Citation

Glode, Vincent and Opp, Christian C. and Sverchkov, Ruslan, To Pool or Not to Pool? Security Design in OTC Markets (December 17, 2019). Available at SSRN: https://ssrn.com/abstract=2871374 or http://dx.doi.org/10.2139/ssrn.2871374

Vincent Glode (Contact Author)

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

Christian C. Opp

University of Rochester - Simon Business School ( email )

Rochester, NY 14627
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Ruslan Sverchkov

University of Pennsylvania - The Wharton School ( email )

3641 Locust Walk
Philadelphia, PA 19104-6365
United States

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