A Theory of Participation in OTC and Centralized Markets

105 Pages Posted: 13 Jun 2019 Last revised: 3 Sep 2021

See all articles by Jerome Dugast

Jerome Dugast

Université Paris-Dauphine, PSL Research University; Université Paris Dauphine - Department of Finance

Semih Uslu

Johns Hopkins University - Carey Business School

Pierre-Olivier Weill

University of California, Los Angeles; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 3, 2021

Abstract

Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we study a model in which banks make costly decisions to participate in an OTC market, a centralized market, or both markets at the same time. Banks differ in their ability to take large positions, what we call their trading capacity. In equilibrium, intermediate-capacity banks find it optimal to participate in the centralized market. In contrast, low- and high-capacity banks find it optimal to participate in the OTC market, due to an endogenous complementarity. Namely, low capacity banks receive worse terms of trade than in the centralized market but better risk sharing, thanks to the intermediation services offered by high-capacity banks. High-capacity banks receive worse risk sharing than in the centralized market, but pro t from the provision of intermediation services to low-capacity banks. While the social optimum has qualitatively similar participation patterns, it prescribes that more customers migrate to the centralized market, and that more dealers enter the OTC market.

Keywords: OTC Markets, Heterogeneity, Intermediation, Composition Externalities, Government Intervention

JEL Classification: G0, G1

Suggested Citation

Dugast, Jerome and Uslu, Semih and Weill, Pierre-Olivier, A Theory of Participation in OTC and Centralized Markets (September 3, 2021). Johns Hopkins Carey Business School Research Paper No. 19-07, Available at SSRN: https://ssrn.com/abstract=3395607 or http://dx.doi.org/10.2139/ssrn.3395607

Jerome Dugast

Université Paris-Dauphine, PSL Research University ( email )

Place du Maréchal de Lattre de Tassigny
Paris, 75016
France

Université Paris Dauphine - Department of Finance ( email )

Place du Maréchal de Lattre de Tassigny
Paris Cedex 16, 75775
France
+33 1 44 05 40 41 (Phone)

HOME PAGE: http://https://sites.google.com/view/jeromedugast/home

Semih Uslu (Contact Author)

Johns Hopkins University - Carey Business School ( email )

100 International Drive
Baltimore, MD 21202
United States
410-234-9237 (Phone)

HOME PAGE: http://www.semihuslu.info

Pierre-Olivier Weill

University of California, Los Angeles ( email )

Box 951477
Los Angeles, CA 90095-1477
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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