Dealer Networks and the Cost of Immediacy
79 Pages Posted: 19 Feb 2021 Last revised: 4 Jan 2023
Date Written: January 4, 2023
We examine how dealer network position affects transaction costs when dealers provide immediacy by taking bonds into inventory. Dealers with central network positions provide more immediacy and revert deviations from their desired inventory faster than peripheral dealers do. The cost of immediacy decreases with centrality for customer trades (centrality discount) and increases with centrality for interdealer trades (centrality premium). These findings support recent network models in which central dealers have a comparative advantage in managing inventory. We isolate the inventory management channel and avoid confounding effects from adverse selection and heterogeneous customer clienteles by using trades around bond index exclusions.
Keywords: Dealer network, dealer inventory, search frictions, transaction costs
JEL Classification: G12
Suggested Citation: Suggested Citation