Less is More

59 Pages Posted: 10 Nov 2022 Last revised: 9 Nov 2023

See all articles by Bart Zhou Yueshen

Bart Zhou Yueshen

Singapore Management University - Lee Kong Chian School of Business

Junyuan Zou

INSEAD

Date Written: October 28, 2022

Abstract

We show in a model of over-the-counter trading that customers in equilibrium may choose to contact very few dealers to incentivize maximum liquidity provision—“less is more.” This happens when dealers’ liquidity supply is sufficiently elastic to competition. A social planner would mandate even fewer contacts than the market outcome, because customers induce excessive dealer competition. The model generates predictions that echo empirical evidence, yields implications for regulation and design of electronic platforms, and speaks to customers’ order splitting behavior and their trading costs.

Keywords: over-the-counter markets, dealers, trading connections, request-for-quote

JEL Classification: D1, G1

Suggested Citation

Yueshen, Bart Zhou and Zou, Junyuan, Less is More (October 28, 2022). Available at SSRN: https://ssrn.com/abstract=4274063 or http://dx.doi.org/10.2139/ssrn.4274063

Bart Zhou Yueshen (Contact Author)

Singapore Management University - Lee Kong Chian School of Business

50 Stamford Rd
Singapore, 178899
Singapore

Junyuan Zou

INSEAD ( email )

Boulevard de Constance
F-77305 Fontainebleau Cedex
France

Do you have a job opening that you would like to promote on SSRN?

Paper statistics

Downloads
274
Abstract Views
1,336
Rank
207,812
PlumX Metrics