Centralizing over-the-counter markets?

Milena Wittwer (Stanford University)

18 janvier 2021, 15h30–17h00


Salle zoom

Job Market Seminar


In traditional over-the-counter (OTC) markets investors trade bilaterally through intermediaries, called dealers. An important regulatory question is whether to centralize OTC markets by shifting trades onto centralized platforms. We address this question in the context of the Canadian government bond market, which is liquid and price transparent. We document that, even in this market, dealers charge significant markups when trading with investors. We also show that there is a price gap between large investors who have access to a centralized platform and small investors who do not. We specify a model to quantify how much of this price gap is due to platform access, and assess welfare effects. The model predicts that not all investors would use the platform, even if platform access were universal. Nevertheless, the price gap between small and large investors would close by 35-52%. Further, total welfare would increase by 9-30% because the platform better allocates high-valued buyers to low-valued sellers.