Inventory Management, Dealers' Connections, and Prices in OTC Markets

86 Pages Posted: 10 Jul 2018

See all articles by Jean-Edouard Colliard

Jean-Edouard Colliard

HEC Paris - Finance Department

Thierry Foucault

HEC Paris - Finance Department

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research

Multiple version iconThere are 2 versions of this paper

Date Written: July 10, 2018

Abstract

We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers’ connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers’ clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.

Keywords: OTC markets, Interdealer trading, Inventory management.

Suggested Citation

Colliard, Jean-Edouard and Foucault, Thierry and Hoffmann, Peter, Inventory Management, Dealers' Connections, and Prices in OTC Markets (July 10, 2018). HEC Paris Research Paper No. FIN-2018-1286. Available at SSRN: https://ssrn.com/abstract=3211285 or http://dx.doi.org/10.2139/ssrn.3211285

Jean-Edouard Colliard (Contact Author)

HEC Paris - Finance Department ( email )

France

Thierry Foucault

HEC Paris - Finance Department ( email )

1 rue de la Liberation
Jouy-en-Josas Cedex, 78351
France
(33)139679569 (Phone)
(33)139677085 (Fax)

HOME PAGE: http://thierryfoucault.com/

Peter Hoffmann

European Central Bank (ECB) - Directorate General Research ( email )

Kaiserstrasse 29
D-60311 Frankfurt am Main
Germany

Register to save articles to
your library

Register

Paper statistics

Downloads
158
Abstract Views
1,152
rank
188,782
PlumX Metrics