Electronic Trading in OTC Markets vs. Centralized Exchange

52 Pages Posted: 4 Jun 2018

See all articles by Ying Liu

Ying Liu

World Federation of Exchanges

Sebastian Vogel

Erasmus University Rotterdam (EUR)

Yuan Zhang

École Polytechnique Fédérale de Lausanne

Multiple version iconThere are 2 versions of this paper

Date Written: June 3, 2018

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 (June 3, 2018). Paris December 2018 Finance Meeting EUROFIDAI - AFFI, Available at SSRN: https://ssrn.com/abstract=3189834 or http://dx.doi.org/10.2139/ssrn.3189834

Ying Liu

World Federation of Exchanges ( email )

125 Old Broad Street
London, EC2N 1AR
United Kingdom

Sebastian Vogel (Contact Author)

Erasmus University Rotterdam (EUR) ( email )

Burgemeester Oudlaan 50
3000 DR Rotterdam, Zuid-Holland 3062PA
Netherlands

Yuan Zhang

École Polytechnique Fédérale de Lausanne ( email )

Station 5
Odyssea 1.04
1015 Lausanne, CH-1015
Switzerland

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