October 19, 2020, 12:30–13:45
Contrary to the prediction of the classic adverse selection theory, a more informed trader receives better pricing relative to a less informed trader in over-the-counter nan- cial markets. Dealers aggressively chase informed orders to better position their future quotes and avoid winner's curse in subsequent trades. On a multi-dealer platform, dealers' incentive of information chasing exactly osets their fear of adverse selection. In a more general setting of OTC markets, information chasing can dominate adverse selection when dealers face dierentially informed speculators, while adverse selection always dominates when dealers face dierentially informed trades from a given specula- tor. These two predictions|which contrast sharply with each other|both nd strong empirical support in the UK government bond market.