We model trading and information diffusion in OTC markets, when dealers can engage in many bilateral transactions at the same time. We show that information diffusion is effective, but not efficient. While each bilateral price partially reveals all dealers' private information after a single round of trading, dealers could learn more even within the constraints imposed by our environment. This is not a result of dealers' market power, but arises from the interaction between decentralization and differences in dealers' valuation of the asset. We apply our framework to confront several explanations for the disruption of OTC markets with stylized facts from the empirical literature. We find more support for narratives emphasizing increased counterparty risk as opposed to increased informational frictions.

We provide a theory of trading through intermediaries in over-the-counter markets. The role of intermediaries is to sustain trade. In our model, traders are connected through an informational network. Agents observe their neighbors’ actions and can trade with their counterparty in a given period through a path of intermediaries in the network. Nevertheless, agents can renege on their obligations. We show that trading through an informational network is essential to support trade when agents infrequently meet the same counteparty. However, intermediaries must receive fees to implement trades. Concentrated intermediation, as represented by a star network, is both constrained efficient and stable when agents incur linking costs. The center agent in a star can receive higher fees as well.