The Limits of Multi-Dealer Platforms

Abstract

On many important multi-dealer platforms, customers mostly request quotes from very few dealers. I build a model of multi-dealer platforms where dealers strategically choose to respond or ignore a request. If the customer contacts more dealers, every dealer responds with a lower probability and offers a stochastically worse price when responding. These two negative effects overturn the customer's benefit from potentially receiving more quotes, worsening her overall price. In equilibrium, the customer contacts only two dealers. Multi-dealer platforms are limited in their ability to promote price competition: No alternative design of information disclosure can improve the customer's payoff above this outcome.

Keywords: Over-the-counter, multi-dealer platforms, request for quote, pre-trade transparency

JEL Classification: D44, D47, D83