When to Introduce Electronic Trading Platforms in Over-the-Counter Markets?
88 Pages Posted: 10 Jan 2017 Last revised: 18 Nov 2019
Date Written: November 1, 2019
I study a hybrid over-the-counter (OTC) market structure in which traders have the choice of obtaining an asset from dealers either in a bilateral market or on an electronic trading platform. In a hybrid market (HM), turnover is higher and traders are better off than in a pure bilateral market (PBM). I present sufficient conditions under which dealer profits are higher in the HM than in the PBM and vice versa. Regulators can improve welfare by mandating electronic trading if search costs on the platform are low. Whether search costs are sufficiently low could be tested, using the model implications.
Keywords: OTC markets, electronic trading, search, market design, efficiency
JEL Classification: D43, D44, D47, D61, D82, D83, G12, G14
Suggested Citation: Suggested Citation