Abstract: We show in a model of over-the-counter trading that customers in equilibrium may choose to contact very few dealers to incentivize maximum liquidity provision—“less is more.” This happens when dealers’ liquidity supply is sufficiently elastic to competition. This mechanism is orthogonal to conventional concerns, such as contacting or search cost, private information, and relationship. A social planner would mandate even fewer contacts than the market outcome, where customers induce excessive dealer competition. The model predicts endogenous market power, yields implications for regulation and design of electronic platforms, and speaks to customers’ search behavior and their execution quality.

Bio:
Bart Zhou Yueshen is an assistant professor of finance at INSEAD. His research focuses on market microstructure, i.e., the trading of financial securities. More details can be found in his CV: https://www.yueshen.me/res/cv/cv.pdf.

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