Dealers as Information Intermediaries in Over-the-Counter Markets

29 Pages Posted: 3 Apr 2019 Last revised: 11 Sep 2021

See all articles by Wei Li

Wei Li

Johns Hopkins University - Carey Business School

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: May 13, 2019

Abstract

We model an OTC market in which informed customers and liquidity customers trade bilaterally and non-anonymously with dealers who know the types of their customers. Dealers not only provide liquidity, but also acquire information from informed customers and resell it to liquidity customers. Dealers willingly offer more favorable pricing terms to a selective subset of informed customers than to liquidity customers, and liquidity customers willingly pay higher trading costs to larger dealers. Dealers can acquire less than socially optimal levels of information from informed customers if dealers themselves can produce information.

Keywords: Dealer, Decentralization, Intermediation, Liquidity, OTC, Private Information, Trading

JEL Classification: G1, G11, G12, G21, D83, D53, D61

Suggested Citation

Li, Wei and Song, Zhaogang, Dealers as Information Intermediaries in Over-the-Counter Markets (May 13, 2019). Available at SSRN: https://ssrn.com/abstract=3351331 or http://dx.doi.org/10.2139/ssrn.3351331

Wei Li

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Zhaogang Song (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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