Asset Heterogeneity, Market Fragmentation, and Quasi-Consolidated Trading
46 Pages Posted: 14 Jul 2020 Last revised: 7 Dec 2022
Date Written: June 20, 2020
Asset heterogeneity is widely believed to restrict liquidity in many markets involving important fixed-income assets. We model the impact of quasi-consolidated (QC) trading---a design that allows sellers to deliver heterogeneous assets for identical payments---on over-the-counter (OTC) markets involving assets with varying values. We show that allowing for QC trading reduces market fragmentation but introduces a cheapest-to-deliver (CTD) effect. In consequence, although QC trading increases total trading volume and social welfare, it hurts liquidity for sellers who do not switch to QC trading and lowers profits for both these sellers and some other sellers who switch to QC trading. Consolidating multiple QC contracts increases (decreases) total trading volume and social welfare if the contracts cover assets with similar (distinct) values.
Keywords: Asset Heterogeneity, Corporate Bonds, Quasi-Consolidated Trading, TBA, MBS, Search
JEL Classification: G1, G11, G12, G21, D83, D53, D61
Suggested Citation: Suggested Citation