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Dealer Networks
Author(s) -
LI DAN,
SCHÜRHOFF NORMAN
Publication year - 2019
Publication title -
the journal of finance
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 18.151
H-Index - 299
eISSN - 1540-6261
pISSN - 0022-1082
DOI - 10.1111/jofi.12728
Subject(s) - immediacy , core (optical fiber) , business , bond , matching (statistics) , commerce , computer science , finance , telecommunications , statistics , mathematics , epistemology , philosophy
Dealers in the over‐the‐counter municipal bond market form trading networks with other dealers to mitigate search frictions. Regulatory data show that this network has a core‐periphery structure with 10 to 30 hubs and over 2,000 peripheral broker‐dealers in which bonds flow from periphery to core and partially back. Central dealers charge investors up to double the round‐trip markups compared to peripheral dealers. In turn, central dealers provide immediacy by matching buyers with sellers more directly and prearranging fewer trades, especially during stress times. Investors thus face a trade‐off between execution cost and speed, consistent with network models of decentralized trade.