Asset Heterogeneity, Market Fragmentation, and Quasi-Consolidated Trading

46 Pages Posted: 14 Jul 2020 Last revised: 7 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: June 20, 2020

Abstract

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

Li, Wei and Song, Zhaogang, Asset Heterogeneity, Market Fragmentation, and Quasi-Consolidated Trading (June 20, 2020). Available at SSRN: https://ssrn.com/abstract=3631925 or http://dx.doi.org/10.2139/ssrn.3631925

Wei Li (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

Zhaogang Song

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States

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