Rent-Seeking Platforms

46 Pages Posted: 21 Jul 2019 Last revised: 7 Sep 2021

See all articles by Rodney Garratt

Rodney Garratt

University of California, Santa Barbara (UCSB)

Michael Lee

Federal Reserve Banks - Federal Reserve Bank of New York

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics

Robert M. Townsend

Massachusetts Institute of Technology (MIT)

Date Written: September 7, 2021

Abstract

Asset markets often exhibit a tiered trading structure, where dealers make markets for clients, taking into account future opportunities to unwind positions through trades with other dealers. The extent to which dealers successfully unwind is complicated by the fact that individual market-making activities can cause them to become asymmetrically informed, a situation that can be lessened or worsened by post-trade reporting. A rent-seeking platform that sells information on trades has an incentive to maximize this informational asymmetry, thus maximizing the value of the information it sells. This can result in the lowest liquidity provision that is obtainable in equilibrium under any exogenously fixed post-trade information structure.

Keywords: inter-dealer markets, liquidity, information design, platforms

JEL Classification: D62, D82, G14, G23

Suggested Citation

Garratt, Rodney and Lee, Michael and Martin, Antoine and Townsend, Robert M., Rent-Seeking Platforms (September 7, 2021). FRB of New York Staff Report No. 892, Available at SSRN: https://ssrn.com/abstract=3422922 or http://dx.doi.org/10.2139/ssrn.3422922

Rodney Garratt

University of California, Santa Barbara (UCSB) ( email )

Michael Lee (Contact Author)

Federal Reserve Banks - Federal Reserve Bank of New York ( email )

33 Liberty Street
New York, NY 10045
United States

Antoine Martin

Federal Reserve Bank of New York - Research and Statistics ( email )

33 Liberty Street
New York, NY 10045
United States
212-720-6943 (Phone)

Robert M. Townsend

Massachusetts Institute of Technology (MIT) ( email )

77 Massachusetts Avenue
50 Memorial Drive
Cambridge, MA 02139-4307
United States

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