Over-the-Counter versus Limit-Order Markets: The Role of Traders’ Expertise

Glode, Vincent; Opp, Christian C.

doi:10.1093/rfs/hhz061

Cited by 46 publications

(18 citation statements)

References 56 publications

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“…While the mechanism in our paper is different, we note that a result that search frictions should not unambiguously lead to more efficient outcomes has also been explored theoretically in Glode and Opp (2018). They find that more severe frictions in OTC markets (as opposed to centralized limit-order markets) lead to a more cautious and generous pricing and, as a result, to strategic acquisition of expertise by well-connected traders.…”

Section: Counterfactual Analysis: Search Frictionsmentioning

confidence: 63%

Venture Capital Contracts

2019

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We estimate the impact of venture capital (VC) contract terms on startup outcomes and the split of value between the entrepreneur and investor, accounting for endogenous selection via a novel dynamic search and matching model. The estimation uses a new, large data set of first financing rounds of startup companies. Consistent with efficient contracting theories, there is an optimal equity split between agents, which maximizes the probability of success. However, VCs use their bargaining power to receive more investor-friendly terms compared to the contract that maximizes startup values. Better VCs still benefit the startup and the entrepreneur, due to their positive value creation. Counterfactuals show that reducing search frictions shifts the bargaining power to VCs and benefits them at the expense of entrepreneurs. The results show that selection of agents into deals is a first-order factor to take into account in studies of contracting.

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Section: Counterfactual Analysis: Search Frictionsmentioning

confidence: 63%

Venture Capital Contracts

2019

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“…Since the financial crisis, the opacity and complexity in the OTC markets have been blamed for causing systemic risk and inefficiency (Duffie et al, 2010;Glode and Opp, 2017;Zhong, 2016). Hence, policy-makers have been paying their attention to setting up more transparent centralized platforms to replace OTC markets, especially for standard OTC assets/securities (see Duffie et al, 2010;Glode and Opp, 2017;Zhong, 2016). These centralized platforms include central counterparties (a centralized clearing mechanism), exchanges, 1 and electronic trading platforms (Duffie et al, 2010).…”

Section: Introductionmentioning

confidence: 99%

Periodic, Complete‐participation Trade in the Lagos‐rocheteau Model

Liao

2019

Bulletin of Econ Res

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This paper contributes to a recent policy discussion regarding the costs and benefits of setting up a centralized electronic trading platform to replace over‐the‐counter (OTC) markets. We modify the Lagos and Rocheteau (2009, henceforth LR) asset trading model by replacing their investor‐dealer random matching and bilateral trade with a centralized competitive market that opens periodically. This arrangement preserves the main tension and trade‐off in LR. We then analyse and quantify when to introduce a centralized market and how frequently it should open in order to make it as efficiently as the decentralized OTC market in LR.

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“…Existing models of OTC trading distinguish the OTC market from exchanges by properties other than the dealers' ability to price discriminate. Prior literature focuses on differences in price transparency (Pagano and Roell, 1996), the sequentiality of contacting counterparties over-the-counter (Glode and Opp, 2017), or the dealers' ability to contract with investors (Grossman, 1992) or to discriminate according to order size (Seppi, 1990, Malinova andPark, 2013). 6 Malamud and Rostek (2017) and Babus and Parlatore (2017) analyze the welfare effects of decentralized trading, focusing on a context without adverse selection.…”

Section: Introductionmentioning

confidence: 99%

“…8 We discuss Alternative Trading Systems (ATSs) and other equities market terminology in Section 2.1. (Babus and Parlatore, 2017), or that outcomes observed in practice is efficient (Glode and Opp, 2017).…”

Section: Introductionmentioning

confidence: 99%

Why Trade Over-the-Counter? When Investors Want Price Discrimination

Lee¹,

Wang²

2018

SSRN Journal

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Despite the availability of low-cost exchanges, over-the-counter (OTC) trading is pervasive for most assets. We explain the prevalence of OTC trading using a model of adverse selection, in which informed and uninformed investors choose to trade over-the-counter or on an exchange. OTC dealers' ability to price discriminate allows them to imperfectly cream-skim the uninformed investors from the exchange. Assets with lower adverse selection risk are predicted to have a higher fraction of trades over-the-counter, as observed in practice. The presence of an OTC market increases aggregate trade volume and reduces average bid-ask spread; nonetheless, welfare declines when adverse selection risk is low.Surprisingly, for assets that are mostly traded over-the-counter, closing the OTC market improves welfare, providing support for recent regulatory efforts to end OTC trading in those assets. JEL-Classification: D47, G14, G18, G23

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Over-the-Counter versus Limit-Order Markets: The Role of Traders’ Expertise

Cited by 46 publications

References 56 publications

Venture Capital Contracts

Venture Capital Contracts

Periodic, Complete‐participation Trade in the Lagos‐rocheteau Model

Why Trade Over-the-Counter? When Investors Want Price Discrimination

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