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2. Asset Dissemination Through Dealer Markets

Author

Jean-Edouard Colliard, Gabrielle Demange, Ecole des Hautes Etudes Commerciales (HEC Paris), Paris School of Economics (PSE), École des Ponts ParisTech (ENPC)-École normale supérieure - Paris (ENS Paris), Université Paris sciences et lettres (PSL)-Université Paris sciences et lettres (PSL)-Université Paris 1 Panthéon-Sorbonne (UP1)-Centre National de la Recherche Scientifique (CNRS)-École des hautes études en sciences sociales (EHESS)-Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement (INRAE), Paris Jourdan Sciences Economiques (PJSE), Université Paris 1 Panthéon-Sorbonne (UP1)-École normale supérieure - Paris (ENS Paris), Université Paris sciences et lettres (PSL)-Université Paris sciences et lettres (PSL)-École des hautes études en sciences sociales (EHESS)-École des Ponts ParisTech (ENPC)-Centre National de la Recherche Scientifique (CNRS)-Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement (INRAE), Paris-Jourdan Sciences Economiques (PSE), École normale supérieure - Paris (ENS Paris), Université Paris sciences et lettres (PSL)-Université Paris sciences et lettres (PSL)-Institut National de la Recherche Agronomique (INRA)-École des hautes études en sciences sociales (EHESS)-École des Ponts ParisTech (ENPC)-Centre National de la Recherche Scientifique (CNRS), HEC Research Paper Series, and École normale supérieure - Paris (ENS Paris)-Institut National de la Recherche Agronomique (INRA)-École des hautes études en sciences sociales (EHESS)-École des Ponts ParisTech (ENPC)-Centre National de la Recherche Scientifique (CNRS)

Subjects
Process (engineering), Strategy and Management, Monetary economics, JEL: C - Mathematical and Quantitative Methods/C.C7 - Game Theory and Bargaining Theory/C.C7.C78 - Bargaining Theory • Matching Theory, Management Science and Operations Research, JEL: G - Financial Economics/G.G2 - Financial Institutions and Services/G.G2.G23 - Non-bank Financial Institutions • Financial Instruments • Institutional Investors, Dealer markets, Information asymmetry, JEL: G - Financial Economics/G.G2 - Financial Institutions and Services/G.G2.G21 - Banks • Depository Institutions • Micro Finance Institutions • Mortgages, Intermediation chains, 0502 economics and business, Asset (economics), 050207 economics, OTC markets, Dissemination, 050208 finance, liquidity, Bond, 05 social sciences, 1. No poverty, [SHS.ECO]Humanities and Social Sciences/Economics and Finance, Market liquidity, Commerce, JEL: D - Microeconomics/D.D8 - Information, Knowledge, and Uncertainty/D.D8.D85 - Network Formation and Analysis: Theory, Intermediation, [SHS.GESTION]Humanities and Social Sciences/Business administration, Business, Over-the-counter (OTC) markets
Abstract

In over-the-counter markets for assets, such as bonds and securitizations, large volumes can be split into smaller pieces and gradually sold to several final investors with the intermediation of multiple dealers. This paper proposes a model to study this process, called asset dissemination. A dealer buys several units of an asset from a customer and then sells some units to the dealer’s customers and to a second dealer, who sells to the second dealer’s customers and to a third dealer, and so on. The extent of dissemination is measured by the number of dealers involved and the total customer demand served. We show that asymmetric information on customer demand hinders both dimensions of dissemination. We also study how the quantity to disseminate and the dealers’ funding costs impact dissemination and the prices and quantities in interdealer transactions. This paper was accepted by Gustavo Manso, finance.

Published
2021

3. Inventory Management, Dealers' Connections, and Prices in OTC Markets

Author

Peter Hoffmann, Jean-Edouard Colliard, Thierry Foucault, Paris School of Economics (PSE), École des Ponts ParisTech (ENPC)-École normale supérieure - Paris (ENS Paris), Université Paris sciences et lettres (PSL)-Université Paris sciences et lettres (PSL)-Université Paris 1 Panthéon-Sorbonne (UP1)-Centre National de la Recherche Scientifique (CNRS)-École des hautes études en sciences sociales (EHESS)-Institut National de Recherche pour l’Agriculture, l’Alimentation et l’Environnement (INRAE), Groupement de Recherche et d'Etudes en Gestion à HEC (GREGH), Ecole des Hautes Etudes Commerciales (HEC Paris)-Centre National de la Recherche Scientifique (CNRS), and HEC Research Paper Series

Subjects
050208 finance, Inventory management, 05 social sciences, Holding cost, Market liquidity, Core (game theory), Commerce, Interdealer trading, 0502 economics and business, [SHS.GESTION]Humanities and Social Sciences/Business administration, Business, 050207 economics, OTC markets, 050205 econometrics
Abstract

We propose a new model of interdealer trading. Dealers trade together to reduce their inventory holding costs. Core dealers share these costs efficiently and provide liquidity to peripheral dealers, who have heterogeneous access to core dealers. We derive predictions about the effects of peripheral dealers' connectedness to core dealers and the allocation of aggregate inventories between core and peripheral dealers on the distribution of interdealer prices, the efficiency of interdealer trades, and trading costs for the dealers' clients. For instance, the dispersion of interdealer prices is higher when fewer peripheral dealers are connected to core dealers or when their aggregate inventory is higher.

Published
2018