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Regulating Over-the-Counter Markets

Title / Series / Name
Journal of Finance
Publication Volume
80
Publication Issue
4
Pages
Authors
Lee, Tomy
Wang, Chaojun
Editors
Keywords
Accounting
Finance
Economics and Econometrics
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Lee-Tomy_2025.pdf
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URI
https://hdl.handle.net/20.500.14018/27794
Abstract
Over-the-counter (OTC) trading thrives despite competition from exchanges. We let OTC dealers cream skim from exchanges in an otherwise standard Glosten and Milgrom framework. Restricting the dealer's ability to cream skim induces “cheap substitution”: some traders exit while others with larger gains from trade enter. Cheap substitution implies trading costs, trade volumes, and market shares are poor policy indicators. In a benchmark case, restricting the dealer raises welfare only if trading cost increases, volume falls, and OTC market share is high. By contrast, the restriction improves welfare when adverse selection risk is low. A simple procedure implements the optimal Pigouvian tax.
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Place of Publication
Type
Journal article
Date
2025-05-30
Language
ISBN
Identifiers
10.1111/jofi.13461
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Economics
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