Competition and Information Leakage
Year: 2023
Type: article
Abstract: When seeking to trade in over-the-counter markets, institutional investors typically restrict both the number of potential counterparties they contact and the information they disclose (e.g., by requesting two-sided rather than one-sided quotes). We rationalize these important facts in a model featuring endogenous front-running. Although an additional contact intensifies competition and aids in finding a natural counterparty, it also intensifies information leakage—which can be costly if it helps a losing dealer to front-run. We also address information design: the client optimally provides no information about her trading direction when requesting quotes. We conclude with implications for market design and regulation.
Source: Journal of Political Economy
DOI: 10.1086/727709
Authors: Markus Baldauf, Joshua Mollner
Institutions: University of British Columbia, Northwestern University
Language: English
Subfield: Finance
Domain: Social Sciences
Open Access status: green
OpenAlex ID: W4386636934