When to Introduce Electronic Trading Platforms in Over-the-Counter Markets?
Ecole Polytechnique Fédérale de Lausanne - Swiss Finance Institute
January 19, 2017
I study a hybrid over-the-counter (OTC) market structure in which traders have the choice of obtaining an asset either in a bilateral market or on an electronic trading platform. In a hybrid market (HM), turnover is higher and expected prices are lower than in a pure bilateral market (PBM). I present sufficient conditions under which dealers' profits are higher in the HM than in the PBM and vice versa. Dealers can increase their profits in the HM by colluding to keep their activity on the platform at a certain level.
Number of Pages in PDF File: 71
Keywords: OTC markets, electronic trading, search, market design, efficiency
JEL Classification: D43, D44, D47, D61, D82, D83, G12, G14
Date posted: January 10, 2017 ; Last revised: January 20, 2017