Which Inter-Dealer Market Prevails? An Analysis of Inter-Dealer Trading in Opaque Markets

Bank of England Working Paper No 59

51 Pages Posted: 1 Jun 1998

Date Written: March 1997

Abstract

A number of dealership markets share three common features: customer-dealer trades remain undisclosed, inter-dealer trading forms a substantial part of total trading and dealers have a choice, when dealing with each other, between doing so directly and using an inter-dealer broker (IDB). Using a three-stage market microstructure model, we show that for dealers who have executed undisclosed customer trades, their choice depends on the number of firms who operate as dealers: trading through the IDB being preferable when more than a critical number of dealers participate in the industry and vice versa. Comparative static effects of information asymmetry and market transparency on the critical number of dealers are derived. Subject to a monotonicity constraint, a condition is derived determining which form of inter-dealer market will prevail.

JEL Classification: G14

Suggested Citation

Saporta, Victoria, Which Inter-Dealer Market Prevails? An Analysis of Inter-Dealer Trading in Opaque Markets (March 1997). Bank of England Working Paper No 59, Available at SSRN: https://ssrn.com/abstract=93654 or http://dx.doi.org/10.2139/ssrn.93654

Victoria Saporta (Contact Author)

Bank of England ( email )

Threadneedle Street
London, EC2R 8AH
United Kingdom

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