Dealers as Information Intermediaries in Over-the-Counter Markets
29 Pages Posted: 3 Apr 2019 Last revised: 11 Sep 2021
Date Written: May 13, 2019
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: Suggested Citation