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Trading and Information Diffusion in Over‐the‐Counter Markets
Author(s) -
Babus Ana,
Kondor Péter
Publication year - 2018
Publication title -
econometrica
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 16.7
H-Index - 199
eISSN - 1468-0262
pISSN - 0012-9682
DOI - 10.3982/ecta12043
Subject(s) - diffusion , economics , business , thermodynamics , physics
We propose a model of trade in over‐the‐counter (OTC) markets in which each dealer with private information can engage in bilateral transactions with other dealers, as determined by her links in a network. Each dealer's strategy is represented as a quantity‐price schedule. We analyze the effect of trade decentralization and adverse selection on information diffusion, expected profits, trading costs, and welfare. Information diffusion through prices is not affected by dealers' strategic trading motives, and there is an informational externality that constrains the informativeness of prices. Trade decentralization can both increase or decrease welfare. A dealer's trading cost is driven by both her own and her counterparties' centrality. Central dealers tend to learn more, trade more at lower costs, and earn higher expected profit.