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Financial Intermediation and the Costs of Trading in an Opaque Market

Authors
Richard C. GREEN, Tepper School of Business, Carnegie Mellon University
Burton HOLLIFIELD, Tepper School of Business, Carnegie Mellon University
Norman SCHÜRHOFF, HEC, University of Lausanne and FAME

Date
February 2005

Click here to download a .pdf of this paper (1'479 KB).

Abstract
Municipal bonds trade in opaque, decentralized broker-dealer markets in which price information is costly to gather. Whether dealers in such a market operate competitively is an empirical issue, but a difficult one to study. Data in such markets is generally not centrally recorded. We analyze a comprehensive database of all trades between broker-dealers in municipal bonds and their customers. The data is only released to the public with a substantial lag, and thus the market was relatively opaque to the traders themselves during our sample period.  We find that dealers earn lower average markups on larger trades, even though larger trades lead the dealers to bear more risk of losses. We formulate and estimate a simple structural bargaining model that allows us to estimate measures of dealer bargaining power and relate it to characteristics of the trades. The results suggest dealers exercise substantial market power. Our measures of market power decrease in trade size and increase in variables that indicate the complexity of the trade for the dealer.

Events

08.07.2015
SFI Lunch & Learn Informationsveranstaltung, Zürich  

27.08.2015
SFI Frühstück Seminar mit Dr. Hans-Joachim Jaeger, Zürich
Thema: AIA, Zahlstellensteuer, FATCA: Big Picture Dynamik der verschiedenen Initiativen und Auswirkungen auf die Geschäftsmodelle von Banken.

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19.06.2015

Swiss Finance Institute publishes the first comprehensive Swiss study on structured products. The most recent SFI White Paper sheds light on the performance, costs, and investments of structured products.
English version, German version, French version, Italian version

20.04.2015

Swiss Finance Institute and zeb.rolfes.schierenbeck.associates launch the first Swiss Asset Management Survey.
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15.04.2015

Swiss Finance Institute publishes its second White Paper on "Will investment banking survive? Regulatory changes and technological advances are altering the investment banking landscape" written by SFI Prof. Semyon Malamud.
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Articles referring to the most recent SFI White Paper—Structured Products: Performance, Costs, and Investments.
NZZ: Performance-Studie zeichnet positives Bild
Finanz und Wirtschaft: Der faire Preis von strukturierten Produkten.
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(19-27.06.2015)

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