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Discussion Paper Details

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Title: Dealer Networks

Author(s): Dan Li and Norman Schürhoff

Publication Date: November 2014

Keyword(s): decentralization, immediacy, liquidity, market quality, municipal bonds, network analysis, over-the-counter financial market, trading cost and transparency

Programme Area(s): Financial Economics

Abstract: Dealers in over-the-counter securities form networks to mitigate search frictions. The audit trail for municipal bonds shows the dealer network has a core-periphery structure. Central dealers are more efficient at matching buyers and sellers than peripheral dealers, which shortens intermediation chains and speeds up trading. Investors face a tradeoff between execution speed and cost. Central dealers provide immediacy by pre-arranging fewer trades and holding larger inventory. However, trading costs increase strongly with dealer centrality. Investors with strong liquidity need trade with central dealers and at times of market-wide illiquidity. Central dealers thus serve as liquidity providers of last resort.

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Bibliographic Reference

Li, D and Schürhoff, N. 2014. 'Dealer Networks'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=10237