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Competing for Order Flow in OTC Markets
Author(s) -
LESTER BENJAMIN,
ROCHETEAU GUILLAUME,
WEILL PIERREOLIVIER
Publication year - 2015
Publication title -
journal of money, credit and banking
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 1.763
H-Index - 108
eISSN - 1538-4616
pISSN - 0022-2879
DOI - 10.1111/jmcb.12215
Subject(s) - order (exchange) , flow (mathematics) , asset (computer security) , high frequency trading , order book , business , financial economics , microeconomics , monetary economics , economics , computer science , industrial organization , algorithmic trading , finance , mathematics , computer security , geometry
We develop a model of a two‐sided asset market in which trades are intermediated by dealers and are bilateral. Dealers compete to attract order flow by posting the terms at which they execute trades—which can include prices, quantities, and execution speed—and investors direct their orders toward dealers who offer the most attractive terms. We characterize the equilibrium in a general setting, and we illustrate theoretically and numerically how the model can account for several important trading patterns in over‐the‐counter markets, which do not emerge from existing models.