Working Paper: CEPR ID: DP13093
Authors: Jean-Edouard Colliard; Thierry Foucault; Peter Hoffmann
Abstract: We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers' connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers' clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.
Keywords: OTC markets; interdealer trading; inventory management
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Peripheral dealers' connectedness to core dealers (L14) | trading efficiency (G14) |
| Peripheral dealers' connectedness to core dealers (L14) | price dispersion (L11) |
| Core dealers' aggregate inventory (L68) | transaction prices among peripheral dealers (D49) |
| Loss of access to core dealers by peripheral dealers (L14) | price dispersion (L11) |
| Peripheral dealers' connectedness to core dealers (L14) | trading costs (F12) |