Rent-Seeking Platforms

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: 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