Place du Maréchal de Lattre de Tassigny
Institutional Affiliation: Université Paris-Dauphine
NBER Working Papers and Publications
|May 2019||A Theory of Participation in OTC and Centralized Markets|
with Semih Üslü, Pierre-Olivier Weill: w25887
Should regulators encourage the migration of trade from over-the-counter (OTC) to centralized markets? To address this question, we consider a model of equilibrium and socially optimal market participation of heterogeneous banks in an OTC market, in a centralized market, or in both markets at the same time. We find that banks have the strongest private incentives to participate in the OTC market if they have the lowest risk-sharing needs and highest ability to take large positions. These banks endogenously assume the role of OTC market dealers. Other banks, with relatively higher risk-sharing needs and lower ability to take large positions, lie at the margin: they are indifferent between the centralized market and the OTC market, where they endogenously assume the role of customers. We sho...