Electronic Trading in OTC Markets vs. Centralized Exchange

54 Pages Posted: 7 Aug 2017 Last revised: 22 Mar 2018

See all articles by Ying Liu

Ying Liu

Shanghai University of Finance and Economics - Department of Finance

Sebastian Vogel

Swiss Finance Institute; Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne

Yuan Zhang

Ecole Polytechnique Fédérale de Lausanne

Multiple version iconThere are 2 versions of this paper

Date Written: December 22, 2017

Abstract

We model a two-tiered market structure in which an investor can trade an asset on a trading platform with a set of dealers who in turn have access to an interdealer market. The investor's order is informative about the asset's payoff and dealers who were contacted by the investor use this information in the interdealer market. Increasing the number of contacted dealers lowers markups through competition but increases the dealers' costs of providing the asset through information leakage. We then compare a centralized market in which investors can trade among themselves in a central limit order book to a market in which investors have to use the electronic platform to trade the asset. With imperfect competition among dealers, investor welfare is higher in the centralized market if private values are strongly dispersed or if the mass of investors is large.

Keywords: OTC markets, RFQ, market design, electronic trading, dealer intermediation

JEL Classification: D44, D47, D82, G12, G14

Suggested Citation

Liu, Ying and Vogel, Sebastian and Zhang, Yuan, Electronic Trading in OTC Markets vs. Centralized Exchange (December 22, 2017). Swiss Finance Institute Research Paper No. 18-19. Available at SSRN: https://ssrn.com/abstract=3013615 or http://dx.doi.org/10.2139/ssrn.3013615

Ying Liu

Shanghai University of Finance and Economics - Department of Finance

Shanghai, 200433
China

Sebastian Vogel (Contact Author)

Swiss Finance Institute ( email )

c/o University of Geneva
40, Bd du Pont-d'Arve
CH-1211 Geneva 4
Switzerland

Ecole Polytechnique Fédérale de Lausanne - Ecole Polytechnique Fédérale de Lausanne ( email )

EXTRA 127
Quartier UNIL-Dorigny
Lausanne, CH-1015
Switzerland

Yuan Zhang

Ecole Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

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