Discussion paper

DP10237 Dealer Networks

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.


Schürhoff, N and D Li (2014), ‘DP10237 Dealer Networks‘, CEPR Discussion Paper No. 10237. CEPR Press, Paris & London. https://cepr.org/publications/dp10237