Endogenous Market Structure: Over-the-Counter versus Exchange Trading

In today's seminar Ji Hee Yoon discusses her paper on Endogenous Market Structure: Over-the-Counter versus Exchange Trading

Abstract: 

For many assets, traders favor either over-the-counter (OTC) or centralized markets. This paper examines how traders' choice between these trading venues depends on asset and trader characteristics.  Market structures are endogenously determined by traders' individual choices of market and counterparty. Traders choose OTC markets over centralized exchanges when the idiosyncratic component dominates in their individual asset valuations and their private information is sufficiently inaccurate. It is due to the benefit of learning the asset value from the price and lowering the price impact. Endogenizing traders choices on the trading venues derives rich market structures: either only OTC or centralized market, or both. The OTC and centralized markets coexist only when traders' asset values are heterogeneously correlated and when the centralized market is imperfectly competitive.