NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH
loading...

Competing for Order Flow in OTC Markets

Benjamin Lester, Guillaume Rocheteau, Pierre-Olivier Weill

NBER Working Paper No. 20608
Issued in October 2014
NBER Program(s):The Asset Pricing Program, The Economic Fluctuations and Growth Program

We develop a model of a two-sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades-- which can include prices, quantities, and execution speed--and investors direct their orders toward dealers that offer the most attractive terms. We characterize the equilibrium in a general setting, and illustrate how the model can account for several important trading patterns in over-the-counter markets which do not emerge from existing models. We then study two special cases which allow us to highlight the differences between these existing models, which assume investors engage in random search for dealers and then use ex post bargaining to determine prices, and our model, which utilizes the concept of competitive search in which dealers post terms of trade. Finally, we calibrate our model, illustrate that it generates reasonable quantitative outcomes, and use it to study how trading frictions affect the per-unit trading costs that investors pay in equilibrium.

download in pdf format
   (851 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w20608

Published: Benjamin Lester & Guillaume Rocheteau & Pierreā€Olivier Weill, 2015. "Competing for Order Flow in OTC Markets," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 47(S2), pages 77-126, 06. citation courtesy of

Users who downloaded this paper also downloaded* these:
Atkeson, Eisfeldt, and Weill w20416 Entry and Exit in OTC Derivatives Markets
Hugonnier, Lester, and Weill w20746 Heterogeneity in Decentralized Asset Markets
Lambert, Ostrovsky, and Panov w20516 Strategic Trading in Informationally Complex Environments
Atkeson, Eisfeldt, and Weill w18912 The Market for OTC Derivatives
Eggertsson and Mehrotra w20574 A Model of Secular Stagnation
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us