Centralizing Over-the-Counter Markets?

In traditional over-the-counter markets, investors trade bilaterally through intermediaries. We assess whether and how to shift trades on a centralized platform with trade-level data on the Canadian government bond market. We document that intermediaries charge a markup when trading with investors a...

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Bibliographic Details
Published in:The Journal of political economy 2023-12, Vol.131 (12), p.3310-3351
Main Authors: Allen, Jason, Wittwer, Milena
Format: Article
Language:English
Subjects:
Bond markets
Centralization
Economic theory
Government bonds
Political economy
Welfare
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Summary:In traditional over-the-counter markets, investors trade bilaterally through intermediaries. We assess whether and how to shift trades on a centralized platform with trade-level data on the Canadian government bond market. We document that intermediaries charge a markup when trading with investors and specify a model to quantify price and welfare effects from market centralization. We find that many investors would not use the platform, even if they could, because it is costly, competition for investors is low, and investors value relationships with intermediaries. Market centralization can even decrease welfare, unless competition is sufficiently strong.
ISSN:0022-3808
1537-534X
DOI:10.1086/725361