Dealer Expertise and Market Concentration in OTC Trading

49 Pages Posted: 7 Jul 2020 Last revised: 16 Dec 2022

See all articles by Wei Li

Wei Li

Johns Hopkins University - Carey Business School

Zhaogang Song

Johns Hopkins University - Carey Business School

Date Written: 2020

Abstract

In most over-the-counter markets, a few dealers build large research teams and account for major proportions of customer trades. We endogenize dealer expertise and size in a model in which each customer values such expertise and chooses one dealer to trade with. In equilibrium, when a dealer attracts more customers, she acquires more expertise and enjoys greater market power, with the former effect benefiting whereas the latter hurting her customers. Ex ante identical dealers may differ in equilibrium. While social welfare increases with customers’ concentration, customers themselves fare better with intermediate levels of concentration. Improved transparency tends to reduce market concentration.

Keywords: Bilateral Trading, Dealer, Expertise, Network, OTC, Private Information

JEL Classification: G11, G12, G21

Suggested Citation

Li, Wei and Song, Zhaogang, Dealer Expertise and Market Concentration in OTC Trading (2020). Johns Hopkins Carey Business School Research Paper No. 22-03, Available at SSRN: https://ssrn.com/abstract=3624307 or http://dx.doi.org/10.2139/ssrn.3624307

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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