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Exchanges formalize and standardize trading. They als... (2009)
BibTeX
@MISC{Monnet09exchangesformalize,
author = {Cyril Monnet and Ted Temzelides and Cyril Monnet and Ted Temzelides},
title = {Exchanges formalize and standardize trading. They als...},
year = {2009}
}
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Abstract
Clearinghouses support financial trades by keeping records of transactions and by providing liquidity through short-term credit that is periodically cleared by participants. We study efficient clearing arrangements for formal exchanges, where traders must clear with a clear-inghouse, and for over-the-counter (OTC) markets, where trades can be cleared bilaterally. When clearing is costly, we show that it can be efficient to subsidize the clearing process for OTC transactions by charging a higher price for the clearing of transactions in exchanges. This necessitates a clearinghouse that operates across both markets. As a clearinghouse offers credit, intertemporal incentives are needed in order to ensure settlement. An increase in the costs of liquidity provision worsens the incentives to settle. Hence, when liquidity
